Interest rates will stay low for longer – but household debt is a worry, says BoE

Interest rates will stay low for longer - but household debt is a worry, says BoE

Interest rates are likely to stay lower for longer – meaning that policymakers must stand ready to rein in excessive lending, the Governor of the Bank of England has said.

Mark Carney said interest rates were likely to remain low “for a considerable period of time”, even though the next move in rates was likely to be up, reports The Telegraph.

“The question in my mind is when is the appropriate time for interest rates to increase in this economy, consistent with the strength of the domestic economy,” he told the Treasury Select Committee (TSC).

Commitee (FPC), which is responsible for UK financial stability, was keeping a close eye on a rise in household borrowing.

The Governor, who chairs the FPC and the Monetary Policy Committee (MPC), which sets interest rates, said a rise in consumer credit was “clearly an issue”.

“More indebted households are more vulnerable – and while the level of household debt has fallen notably over the course of the last five years, it is still at very elevated levels and we don’t necessarily see it reducing further.

“In fact as we have just been discussing we can see an uptick largely due to dynamics in the housing market,” he said.

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

But Mr Haldane rejected an assertion by MP Mark Garnier that the housing market was “going gangbusters again” and said aggregate credit growth did not point to a “debt-fuelled boom”.

“That’s not the way that I would read the current numbers,” he said, highlighting that mortgage approvals were far from “racing away”.

The Financial Policy Committee publishes its twice yearly Financial Stability Report (FSR) next week, when it will reveal the results of its latest bank stress tests. The report will also shed further light on the risks posed by the buy-to-let market.

Chancellor George Osborne told the TSC in October that he was preparing to give Bank policymakers more powers to police the market.

Sir Jon Cunliffe, deputy Governor for financial stability, recently hinted that policymakers could raise the countercyclical buffer for banks, forcing them to to build up capital in good times in order to cover losses on loans during a downturn. Mr Carney said on Tuesday that such a move could help to rein in excessive lending and “ensure the sustainability of the credit cycle”.

In a two-hour TSC session on Tuesday, Kristin Forbes, an external member of the MPC, also stressed that the next move in interest rates was likely to be up.

“Given the state of the UK economy, a solid recovery, I still believe certainly the next move in interest rates will be up, we will not require loosening,” she said.

Ms Forbes noted that the labour market was becoming “quite tight” as she highlighted Bank data that showed annual wage growth was “above 5pc in sectors that account for a quarter of employment in the UK”.

The pound slipped against the dollar and euro on Tuesday following Mr Carney’s message that rates, which have stood at 0.5pc since March 2009, were likely to remain lower for longer.

“Even with limited and gradual rate increases it still will be a relatively low interest rate environment,” he said.

Ms Forbes said unit labour costs, which balance pay and productivity, were not currently rising at a pace that would prompt her to start voting to raise interest rates.

“The cost price pressure to date is not yet sufficient to be consistent with inflation heading back towards our 2pc target,” she said.

This suggests she is unlikely to join Ian McCafferty in voting for tighter policy in the near future. Mr McCafferty is one of the MPC’s noted “hawks”, preferring for the Bank rate to rise sooner, rather than later.

Separate data on Tuesday showed UK retailers saw a surprise slowdown in sales in November in evidence that consumers were delaying their spending sprees for Black Friday.

The Confederation of British Industry (CBI) said 38pc of businesses it surveyed reported an increase in sales volumes in the year to November, compared with 31pc that reported a fall.

The resulting positive balance of 7pc was below October’s reading of 19pc and represented a nine month low. it was also significantly lower than the expected figure of 28pc.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the figures did not reflect “the underlying strength of retail sales”.

He said: “The survey was conducted in early November, and more consumers than last year may have postponed spending to Black Friday on November 27 … Trading over the key pre-Christmas trading period should be brisk, thanks to recent solid growth in real incomes and high consumer confidence.”

While sales volumes eased, the CBI’s survey of 117 retailers and wholesalers showed companies have been recruiting at their strongest rate for 17 years.