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LONDON (Reuters) - British household borrowing jumped last month, bucking expectations of a slowdown and suggesting consumers might be upbeat enough for the Bank of England to start raising interest rates later this year.
Consumers -- the drivers of the country's economic growth -- are under pressure from a rise in inflation after last year's vote to leave the European Union caused sterling to plunge.
But the BoE expects the slowdown to be gentle enough that business investment and exports should fill most of the gap.
If that proves right, most of the BoE's rate-setters might swing behind the first British rate rise in a decade, following the lead of the U.S. Federal Reserve.
There have also signs of a shift by central bankers in the euro zone and Japan away from the emergency support that have held up their economies since the global financial crisis.
The BoE said on Thursday that consumer lending grew at an annualised rate of 10.2 percent in the three months to May -- its joint-fastest rate since hitting an 11-year high in November.
The net increase of 1.7 billion pounds ($2.2 billion) in May was the biggest in six months and beat all forecasts in a Reuters poll of economists. So too did the number of mortgages approved and net mortgage lending.
By contrast, other recent measures have suggested consumers are subdued. Retail sales suffered their biggest drop since 2010 in the first three months of 2017.
On Thursday, supermarket chain Asda said household spending power saw its biggest squeeze since 2013 in May.
It also remains to be seen how Prime Minister Theresa May's failure to win a majority in June 8's parliament election affects attitudes about spending.
A European Commission survey showed consumer morale in June was its weakest since the Brexit vote as households digested the implications of the inconclusive election.
Ruth Gregory of Capital Economics said the rise in borrowing growth "was something of a double-edged sword" for the BoE which is trying to assess what damage a rate hike might cause for households and their spending.
"May's household borrowing figures provide another reason to think that consumer spending growth may have picked up pace ... but will clearly add to concerns about household debt."
BoE Governor Mark Carney said this week that consumer borrowing was rising far faster than incomes and the BoE would bring forward its annual check on lenders who have loosened their credit standards.
The BoE says raising interest rates from a record low 0.25 percent is its last line of defence to check risky lending.
Instead, any rate hike decision will be driven by the outlook for inflation which hit its highest in nearly four years at 2.9 percent in May, above the BoE's target of 2 percent.
For three of the BoE's eight rate-setters, there were enough warning signs that the rise of inflation could stick to justify an immediate rate rise when they met this month.
BoE Chief Economist Haldane then surprised financial markets last week by saying he expected back a rate rise this year too, if growth matched the BoE's forecasts. Haldane said on Thursday the central bank needed to "look seriously" at raising rates.
Carney had seemed more sceptical but on Wednesday he did not repeat previous comments that now was not the time for a hike.
Investors took his comments as a signal that a rate rise was looming and they pushed yields on two-year British government debt to the highest since before the Brexit vote.
Many economists urged caution. They have been wrong-footed in the past over BoE rates signals.
"(There are) too many mixed messages from the (Monetary Policy Committee) at the moment," Alpesh Paleja, an economist at the Confederation of British Industry, said on Twitter. "(I'm) not convinced Carney has turned hawkish."
While business surveys point to stronger exports and business investment, this has not yet shown up in official data. Furthermore, wage growth - which some BoE policymakers see as the key driver of medium-term inflation - remains weak.
($1 = 0.7713 pounds)
Editing by Jeremy Gaunt