Borrowers rock the boat

SO MUCH for the warning shots across the bow of the consumer. Despite a rise in base rates in November and a much-anticipated further rise to 4% in February, Britain is buying on tick regardless.

The January borrowing figures pre-date the most recent quarter point rise in base rates. Even so, they are a shocker. Consumer borrowing soared to £1.9bn over the month against £873m in December, the highest figure since May 2003.

Overall total household borrowing is now at £10.6bn. The exponential growth is in credit card lending, despite warnings from Matt Barrett of Barclays. The net amounts run up on plastic average £744m a month against £435m in the final quarter of 2003.

Great news for the banks already racking up magnificent profits, but not for the Bank of England, which is terrified of getting the blame for an unsustainable consumer boom.

Simon Rubinsohn of broker Gerrard estimates that total household debt stands at 124% of disposable-income, compared to 90% in 1998, soon after Labour came to office. This is proving manageable for borrowers because interest rate levels remain reasonably low.

But every notch up in base rates is starting to hurt. And people borrowing on credit cards are running up interest charges double, treble or even quadruple base rates.

A major reason for concern about consumer borrowing is what it says about the economic recovery. At the Treasury they have been celebrating the uncanny knack of the Chancellor to bring in growth rates on target.

But the mix contributing to output expansion is not what is required. Too much is coming from the consumer boom and the public sector, where supply bottlenecks are rampant and wages are rising at twice the level in private enterprise.

Manufacturing, for its part, feels much more confident than in recent years, but is starting to feel the draught from the firm pound. The latest purchasing managers' index dropped far more sharply than expected, even though it remains well in positive territory.

This is proving to be far from a balanced recovery and the Monetary Policy Committee, which meets again tomorrow, faces tough choices in the months ahead.

Bank largesse

THE OLD Hong Kong & Shanghai Banking Corporation once prided itself on being the bank that ran itself like the Foreign Office. Executives were moved around the globe like clockwork, promoted from within and enjoyed generous benefits - such as good pensions and health care.

But Scottish colonial values meant it never indulged in the extravagant awards festooning the reports of comparable financial institutions. Now all that is changing. HSBC is being tainted by its new directions.

Household in the United States may have been a fabulous acquisition. But the £121m of options and benefits held by its boss William Aldinger is almost Disney-like in its proportions.

Similarly, HSBC's efforts to build on its investment banking skills internally, rather than paying a huge premium to buy one of the successful New York houses, is sensible.

But the £25m of rewards being handed over to two executives, believed to be the high-octane John Studzinski and Stuart Gulliver, could distort structures within the group.

Indeed, Sir John Bond, chairman and architect of HSBC's expansion into new markets, now receives remuneration amounting to £4.5m with options - something his predecessors could only dream about.

In America everyone aspires to earn as much as the boss and salary envy is much less prevalent than in Britain. If HSBC is moving its rewards in the US direction, it must also consider the impact on pay throughout the bank and the morale of its staff.

Abbey pain

ABBEY National has joined a small but not very distinguished group of insurers by axing bonuses to the 850,000 policyholders persuaded to put their savings in its with-profits funds.

The only companies to take such a radical step so far are Equitable Life - which is finally scrambling towards safety after three terrible years - and the Britannic.

Under its previous management Abbey expanded rapidly into insurance in the 1980s, buying Scottish Mutual and Scottish Provident. Now policyholders and shareholders are paying the price.

Last week the bank had to bolster its insurance solvency margin by £373m - this week it is asking policyholders to share the burden. Abbey acknowledges that it does not yet know if it has done enough to deal with the problems in its insurance holdings.

Rebranding may not be enough to see it through this crisis.