UK braces for rate in­crease never ex­pe­ri­enced by young debtors

The Pak Banker - - COMPANIES/BOSS -

Af­ter more than six years of record­low in­ter­est rates, the loom­ing in­crease hinted at by Bank of Eng­land pol­icy mak­ers may come as a shock to con­sumers driv­ing Bri­tain's re­cov­ery.

As Gover­nor Mark Car­ney sig­nals that rates could rise early next year, of­fi­cials are weigh­ing the po­ten­tial costs for the fastest-grow­ing econ­omy in the Group of Seven. A risk is that highly in­debted house­holds cur­tail their spend­ing, putting the brakes on an ex­pan­sion get­ting no help from ex­ports.

"There's a gen­eral level of un­cer­tainty, given that we've not had a rate in­crease for so long". For many peo­ple un­der the age of 30, the in­crease will be the first of their work­ing lives. The BOE has held its bench­mark at 0.5 per­cent since March 2009, help­ing to fuel a hous­ing boom that has left Bri­tons ow­ing a record 1.5 tril­lion pounds ($2.3 tril­lion). The key rate av­er­aged 4.5 per­cent in the pre­ced­ing six years.

"I would ex­pect the econ­omy to be more sen­si­tive to a 25 ba­sis-point rise than in the past, since the level of house­hold debt in the econ­omy is still rel­a­tively high," said David Tins­ley, an economist at UBS Group AG in Lon­don. "There's a seg­ment of the house­hold sec­tor whose per­cep­tions of a nor­mal rate of in­ter­est is con­di­tioned to be very low."

One such per­son is Naomi Scot­tMearns, a 23-year-old en­vi­ron­men­tal con­sul­tant who is sav­ing to buy a home in Lon­don.

"I think rates will rise within the next few years," she said. "It is a real con­cern for peo­ple hav­ing to con­sider an in­ter­e­strate rise. I think some peo­ple will have to scale back spend­ing."

At more than 140 per­cent of in­come, the debt bur­den of Bri­tish house­holds is higher than in the U.S., Ger­many and France, and gov­ern­ment fore­cast­ers see it ris­ing to al­most 170 per­cent by 2020. BOE fi­nan­cial-sta­bil­ity of­fi­cials es­ti­mate about 5 per­cent of house­holds have debts equal to four times their in­come or more.

A rate in­crease would im­me­di­ately push up the cost of vari­able-rate mort­gages, which ac­count for al­most 60 per­cent of out­stand­ing homes loans. The pref­er­ence for fixed-rate loans in re­cent years may of­fer lit­tle respite as many are on short terms, ac­cord­ing to So­ci­ete Gen­erale SA economist Brian Hil­liard.

While most per­sonal in­debt­ed­ness is made up of mort­gages, un­se­cured debt such as credit-card bor­row­ing is grow­ing at about 8 per­cent an­nu­ally and on course to reach 10,000 pounds per house­hold by the end of 2016. To­tal debt costs would rise by 1,000 pounds a year if in­ter­est rates in­crease by 2 per­cent­age points, Price­wa­ter­house Coop­ers es­ti­mated in a re­port in March.

The dan­gers are not lost on the BOE, which took ac­tion last year to stop peo­ple tak­ing on debt they may even­tu­ally strug­gle to af­ford. Car­ney in­sists rates will go up grad­u­ally and peak be­low pre-cri­sis lev­els. Money mar­kets are barely pric­ing in a bench­mark rate of 1 per­cent by Septem­ber next year.

For some econ­o­mists, the longer the BOE de­lays, the big­ger the shock will be to house­holds when pol­icy is tight­ened

For some econ­o­mists, the longer the BOE de­lays, the big­ger the shock will be to house­holds when pol­icy is tight­ened.

The nine-mem­ber Mon­e­tary Pol­icy Com­mit­tee is meet­ing this week against a back­drop of a firm­ing la­bor mar­ket and the long­est stretch of con­tin­u­ous eco­nomic ex­pan­sion since be­fore the fi­nan­cial cri­sis. That could lead a mi­nor­ity to vote for an in­ter­est-rate in­crease.

"We look for three MPC mem­bers to have voted for a 25 ba­sis-point hike this time, ahead of an even­tual Novem­ber hike as mo­men­tum in wage growth con­tin­ues," said Sue Trinh, a cur­rency strate­gist at RBC Cap­i­tal Mar­kets.

Ris­ing liv­ing stan­dards could help in­su­late con­sumers from rate in­creases. Wage growth ac­cel­er­ated at the fastest pace in more than five years in May, while in­fla­tion is zero.

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