UK households withdrew a record amount from their savings last month and were more cautious with credit card spending, according to Bank of England data highlighting the extent of the squeeze on consumers.
The smallest net increase in monthly unsecured lending this year, at £1.1bn, was recorded by the bank in May.
A figure closer to £1.5bn had been expected.
Rising borrowing costs to tackle the country’s inflation problem likely drove people to raid savings instead.
The data showed that households withdrew a net £3.8bn from their accounts – a figure that would have been higher but for inflows into National Savings & Investments accounts.
The bank said it was the largest net monthly outflow on record.
Worryingly, the funds exodus took place before the cost of living crisis took a new twist this month.
It prompted a jump in lenders’ funding costs, prompting many to withdraw and reprice their fixed rate deals.
The correction saw average two-year fixed rate deals pass the 6% mark.
The latest data from Moneyfacts showed that rate at 6.37% on Thursday and the five-year rate averaging almost 6%.
The Bank of England data showed that 50,524 mortgages were approved in May – up from 49,020 in April.
Those figures are likely to go into decline when June’s data becomes available – also reflecting the Bank of England’s policy action of a 0.5 percentage point interest rate hike to 5%.
While financial markets believe bank rate could rise as high as 6.25%, governor Andrew Bailey used remarks at a forum for central banks on Wednesday to suggest that current market expectations may be stretching it.
The bank is trying to quell demand in the economy to bring down inflation, which remained at 8.7% in May.
It hopes that by stifling consumer spending and demand for credit, the pace of wage and price growth will slow and prevent inflation becoming engrained.
It has called on employers to refrain from high wage increases that look to offset damage from inflation and avoid profiteering to help it get bank rate back to its 2% target in the medium term.
Commenting on the bank’s latest data, interactive investor’s senior personal finance expert Myron Jobson said: “As household budgets buckle under the weight of stubborn inflation, the once untouched savings accounts are now facing a storm.
“In the face of rising prices across the breadth of household expenditure, from groceries through to mortgage or rent payments, many may find themselves reluctantly tapping into their rainy-day funds, making it hard to weather the financial tempest.
“In the face of a cost of living crisis, individuals find themselves at a crossroads, forced to make challenging decisions about their hard-earned savings.
“The path of withdrawal, though unavoidable for many, is riddled with risks and long-term consequences. With savings acting as the last line of defence, withdrawals leave savers with less shielding to weather the full brunt of unforeseen costs.”