Banks given boost after 'positive outlook' on borrowing for UK households in 2025

Banks have received a positive outlook as new data forecasts an increase in borrowing growth throughout 2025. Following the Bank of England's decision to cut interest rates three times in the past six months, research from EY Item Club predicts that total UK bank lending will rise to 3.7 per cent this year, up from 2.3 per cent in 2024.

The latest EY Item Club Outlook for Financial Services anticipates that mortgage lending growth will double to 3.1 per cent this year, following a stagnant year in 2023 where growth was at zero per cent before rising to 1.5 per cent in 2024, as reported by City AM.

Due to rising house prices and consistently high mortgage rates, mortgage lending growth is expected to stabilise over time, with growth forecasts at 3.2 per cent for 2026 and 3.6 per cent for 2027.

Dan Cooper, EY UK’s Head of Banking and Capital Markets, commented: "Looking to the year ahead, the increasingly positive outlook for lending and the prospect of relatively low default rates is welcome news for UK banks and their customers."

While acknowledging that the growth rates are still "way off record-highs of past years," Cooper suggested that the forecasts should "provide a boost to banks’ balance sheets and some breathing space".

The Big Four Banks in Britain are all set to post annual results, with Barclays and Natwest having reported last week and both exceeding analysts’ profit expectations.

HSBC will announce its annual results on Wednesday, followed by Lloyds on Thursday. However, it was noted that ‘Optimism must remain measured’

Martina Keane, EY’s UK and Ireland financial services leader, has commented on the strengthening economic recovery in the UK: "The UK’s gradual economic recovery is strengthening confidence and translating into more appetite to borrow from UK banks."

She further speculated about the potential impact of future interest rate cuts, stating, "Looking to the year ahead, if interest rates are cut further as expected, borrowing costs should fall, the capacity for household spending will grow, and stronger levels of mortgage borrowing should return after two years of little-to-no growth."

However, Keane also cautioned that "optimism must remain measured" due to potential tax increases and geopolitical tensions, which she believes pose a "very real downside risk to market confidence and the overall outlook for growth".

The EY Item Club has revised its bank-to-business forecast downwards, attributing this to impending tax changes, tighter financial conditions, and global trade uncertainty.

Expectations for business borrowing growth now stand at 4.5 per cent, down from the 5.6 per cent projected in November. Despite this, the figure would still represent an increase from 2024, when bank lending to UK businesses grew by 2.9 per cent.