Belfast Telegraph

Bank of England warns of interest rise danger

BY JOHN COLLINGRIDGE

THE Bank of England has warned over the "significant" threat from a sharp rise in interest rates to debt-laden households, banks and finance firms.

In its quarterly financial stability report, it called for City regulators to assess how vulnerable borrowers and financial institutions will be to a sharp rates rise and report back in September.

The bank warned that borrowers would face "significant distress" and "risks could crystallise" if global long-term interest rates were to rise from their current historic lows.

UK borrowers currently benefit from the lowest interest rates on record, with the bank's base rate stuck at 0.5% since 2009, while other central banks around the world have also pushed rates to record lows.

This has allowed cash-strapped households to keep on top of mortgage repayments, despite a fall in real incomes, with lenders also relaxing debt demands through forbearance.

The bank said: "The significant cohorts of UK borrowers could experience financial difficulties if interest rates were to rise during a period of subdued income growth. A rise in interest rates without a strengthening in income could significantly increase borrower distress and losses to banks."

It added that UK household debt remains high as a proportion of income at around 140%, with UK bank lending to households and non-financial firms at around £1.4trn.

Around 9% of UK mortgage holders will have to take action -- such as working longer hours, cutting back on essentials and changing mortgage -- if rates were to rise by just one percentage point, it said.

Sir Mervyn King warned in his last public appearance as governor yesterday that many homeowners in their thirties and forties would not survive if interest rates returned to normal.

A rise in rates could hike bad debt losses at banks, the bank said, as well as increase their funding costs.

A two percentage point rise in rates would force 20% of mortgage borrowers to "take actions to afford debt payments", it added.

It also said some heavily-indebted firms, such as property companies, remain particularly vulnerable, with many relying on lender forbearance. It said commercial property loans account for about 40% of banks' corporate loans.

The bank ordered the Financial Conduct Authority and the Prudential Regulation Authority to report back to its Financial Policy Committee by September on the risks over a sharp rates rise.

Global stock markets have plunged heavily in recent weeks over the US Federal Reserve's plans to reduce another economic support tool -- its vast quantitative easing drive.

The bank said some partial adjustments of low interest rates have taken place already -- possibly in anticipation of changes in monetary policy.

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