A sharp rise in the number of individuals being declared insolvent during the second quarter has prompted some City economists to express concerns about the high level of consumer borrowing.

Leading economists warned the Bank of England to "keep a close eye" on borrowing by individuals, despite yesterday's 0.25 per cent cut in interest rates which should reduce the burden of homeowners' mortgage costs.

Howard Archer, chief UK economist at Global Insight, said: "The sharp jump in the number of individual insolvencies in the second quarter of 2005, to 15,394, highlights the fact that many people have borrowed to their limits, making them vulnerable to even the relatively modest rise in interest rates that occured through to August 2004.

"Furthermore, the recent overall signs that the labour market has started to soften means that there is a growing risk that individual insolvencies will climb markedly further over the coming months.

"While Thursday's cut in interest rates will provide some very modest relief to debtors, there is the danger that it could encourage people to borrow more. This is something the Bank of England will need to keep a close eye on."

The Bank of England cut interest rates for the first time in two years on Thursday as it moved to rejuvenate lacklustre consumers amid a general downturn on the high street and a slowdown in the manufacturing sector.

The City is already suggesting the bank might have to cut interest rates again next month against a backdrop of continued economic uncertainty.

According to figures released today by the Department for Trade & Industry, individual insolvencies in England and Wales rose by 11.7 per cent during the second quarter - a 36.8 per cent increase compared with the same period a year ago.

Tthe DTi said the number of companies collapsing as a result of financial difficulties was also on the rise. During the three months to the end of June, the number of companies falling into insolvency rose by 12.5 per cent against the first three months of the year, an increase of 6 per cent on last year.

Unprecedented access to cheap money over the past few years has seen British consumers run up a collective debt bill worth £1 trillion.

As the Bank of England introduced five successive rate rises in a move to stem an increase in inflation, some fell into difficulties trying to sustain their debt and interest repayments.

The rate rises also drove up mortgage servicing costs as house prices were beginning to peak, although most economists have expressed confidence that a crash in house prices is unlikely.

John Butler, an economist at HSBC, said: "Perhaps some of the rise [in individual insolvencies] reflects a change in the bankruptcy laws that took effect in April 2004, but interestingly this upward trend pre-dates that change and is mirrored in Scotland where the laws have not been adjusted. "

"The worrying element is that at a time of high employment and low interest rates insolvencies have been rising."

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