Bank of England poised to act if household debt spirals

mark carney

Bank of England policymakers will act “sooner rather than later” to curb credit growth, if the recent rise in household debt starts to gather pace, a top official has said.

The Telegraph reports that Sir Jon Cunliffe, the Bank’s deputy governor for financial stability, said consumer debt remained “large by historic standards”, leaving the UK economy “vulnerable to shocks”.

He said the Financial Policy Committee (FPC), which is in charge of maintaining financial stability, would consider taking action if credit started to grow faster than the economy.

“Given the vulnerability that already exists and the powerful drivers in the UK, particularly the housing market, if credit began again to grow faster than GDP, I would want to think about action to manage the financial stability risks sooner rather than later,” he told an audience in London.

Sir Jon also said Britain’s buy-to-let market warranted closer monitoring because landlords were more sensitive to booms and busts in the housing market.

“I don’t know how that sector of the market, the buy-to-let sector, will react in terms of market stress,” he said. “That could make a crash in house prices, if you get into all these balance sheet problems with households.”

Sir Jon added that Britain’s housing shortage had left the UK economy more vulnerable to build-ups of mortgage debt.

“Given the vulnerability that already exists … if credit began again to grow faster than GDP, I would want to think about action to manage the financial stability risks sooner rather than later.”

The Treasury is currently considering whether to give the FPC, which is in charge of maintaining financial stability, more powers to police the market.

Interest rates have been at a record low of 0.5pc for almost seven years.

While the Bank has signalled that rates are likely to remain unchanged for at least a year, the FPC has a range of tools it can deploy to rein in credit, such as raising capital buffers, while Mark Carney has described monetary policy as “the last line of defence” agaisnt threats to financial stability.

George Osborne, the Chancellor, took some action on the housing market in the Autumn Statement, introducing a 3pc additional levy on buy-to-let properties and second homes.

Sir Jon said household credit grew at an annualised pace of 7pc in the decade leading up to the crisis – more than double the real rate of UK growth over the period – rising to a peak of 177pc of GDP.

Sir Jon highlighted that credit-to-GDP ratios had come down from their pre-crisis peak but remained high by historical standards

However, the ratio dropped dramatically in the aftermath of the crisis to 140pc – and is currently “growing broadly in line with GDP”.

Sir Jon said reductions in interest rates since in recent years were likely to be permanent, which “probably raises the sustainable level of credit to GDP. However, he said it would be “unwise to bet on further upward structural shifts in the level of sustainability.”

British households took on unsecured debt at the fastest pace in nearly 10 years in December, according to official data, with £4.4bn borrowed on credit cards and personal loans.

Andy Haldane, the Bank’s chief economist, said last year that growth in personal loans was “picking up at a rate of knots” as the interest rates on these loans continued to fall.

The number of households borrowing more than five times their income for a mortgage has come down substantially in recent years

Sir Jon said the rise in household debt in the run-up to the crisis did not in itself “finance an economic boom”.

Mr Carney stressed last month that Britain was not in the grip of a “debt-fuelled recovery”, but that “vigilance is required” to ensure Britain’s recovery remains sustainable.

However, Sir Jon said high levels of debt could amplify another downturn as households cut back on all but essential spending. This warranted early action, if danger signs started to emerge again.

“Just as financial cycles build up over a number of years, the risks they pose are perhaps best managed over time,” he said.