Fears are growing that the Bank of England is fuelling a dangerous bubble in consumer debt through cheap loans to banks.
UK banks have now borrowed £78bn from a special low-rate fund set up by the central bank to help keep spending levels up after Brexit.
In turn over the past year the high street has lent rapidly – with car loans, credit card balances and personal loans increasing by 10pc, far faster than incomes.
The Bank of England created a low-rate fund of £100billion to lend to other banks in order to keep up spending after Brexit
The rise in consumer debt led the Bank of England’s financial stability director Alex Brazier to warn last month that Britain could be heading for another major financial crisis.
But as high street lenders ramp up their use of the central bank’s fund, there are concerns it is helping to create the problem it is warning against.
Earlier this month the Bank even increased the fund by £15bn because demand is expected to overshoot the £100bn planned last August.
Former pensions minister Baroness Altmann said: ‘Giving banks lots of cheap money they are inevitably then to issue loans to consumers which they might not otherwise have been able to.
‘That might be fine for the banks but not for the people who end up with unaffordable credit. It’s incredible that history is repeating itself.
‘I think we really have to question, do the banks need this cheap money and what are they using it for.
‘It is a systemic risk. Banks can afford these interest rates if they are getting money virtually free from the Bank of England. They can afford to attract people onto these cheap credit deals.’
But there are fears the cheap cash is leading to a debt bubble as car loans, personal loans, and credit card loans grew far faster than incomes
Mark Carney set up the £100bn Term Funding Scheme after Brexit to help lenders pass on lower rates to their customers.
But there are concerns of the risks for consumers if rates go up or they simply taken on too much debt.
Lloyds Banking Group has now borrowed £13.5bn from the scheme – doubling its use over the first half of 2017 – while Barclays borrowed £10bn in the six months to the end of June, according to analysis by the Sunday Times.
Virgin Money has reportedly taken £4.9bn and has recently ramped up its use of the scheme.
Last month Brazier warned lenders were heading for a ‘spiral of complacency’ as low interest rates encourage a potentially catastrophic borrowing binge.
He said there were ‘signs of boundaries being pushed’ by banks now offering riskier mortgages.
Speaking at the University of Liverpool, he warned: ‘Household debt, like most things that are good in moderation, can be dangerous in excess.
‘Dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy.
‘The economic dangers of debt can be so costly that all else pales in comparison.
Lenders can enter a spiral of complacency. Standards can go quickly from responsible to reckless.
‘The financial system has a habit of creating too much debt. And even when the overall temperature is just right, there can be pockets of debt that are too hot.’
In the last two years, loans amounting to more than four times the borrower’s income have risen from 19 per cent of the market to 26 per cent.
The number of new cars bought with PCP plans — where the car is effectively leased — have soared from one in five in 2006 to four in five.
Last week a leading asset manager warned that consumer debt is a bigger problem for the UK economy than Brexit.
Pyrford International chief executive Tony Cousins told Bloomberg he thought Brexit was a sideshow compared to mounting debt.
He said: ‘The big problem in the U.K. has been the major build up in consumer debt that we’ve seen, particularly whether it’s mortgage debt or car debt or just general consumer debt.’
Mr Cousins said he was avoiding UK banking and retail stocks, warning the economy was set to weaken as consumer debt piles up.
The Bank of England declined to comment.