Household debt spirals – Bank of England promises action

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Key figures at the Bank of England have claimed that they would move “sooner rather than later” in order to counteract growing household debt, which it identifies as a major threat to the UK’s financial stability.

Such is the view of Sir Jon Cunliffe, the deputy governor of the Bank who made a speech in London to underline how the high level of debt to income made British financial markets vulnerable to crises.

The bold claim follows research from 2015 carried out by the Building Societies Association, which discovered that over half of borrowers believe they will struggle to meet, or fall behind on, mortgage repayments if the Bank decided to raise interest rates.

Speaking to financial experts in the capital, Sir Jon said: “We are now back to early 2000s levels of debt to income and income gearing. Household debt, household balance sheets, however, remain large by historic standards. The position is sensitive to the unwinding, were it to occur, of some of the forces that pushed rates down over the past 40 years.

“And of course we remain vulnerable to the resumption of the rates of credit growth, driven by the housing market, seen in the ten-year upswing of the last cycle.”

He added that the “vulnerability” that exists in the UK – specifically that affecting the notoriously unpredictable housing market – and if credit once again started to grow faster than the national GDP, it would be prudent of the Bank to consider preventative action, rather than a cure much further down the line.

Nonetheless, Sir Jon was keen to underline that people should not necessarily consider all debt as bad. He said: “It is an essential part of what makes modern economies grow. It facilitates consumption smoothing, house purchases, investment and risk management. The last eight years have demonstrated what happens to the economy when the credit mechanism is badly damaged.”

Earlier this month, Prudential revealed that people retiring in 2016 will face £3,000 less debt than those who retired in 2015, and that one in five people leaving the world of work this year believe they will be in debt. While the average debt figure has dropped, the organisation still highlighted that those owing money have an average of £18,800 to clear before they are in the black.