Third of British households vulnerable to rate rise

Research by the Bank found that the number of vulnerable UK households remained high six years after the end of the recession, but they “appear a little better placed to cope with a rise in interest rates than a year ago”.

The government’s austerity programme “has weighed on household spending, and it is likely to continue to do so”, the Bank added.

Its annual survey of household finances came before an expected increase in US interest rates today, starting a process of policy normalisation that is likely to pave the way for the Bank to follow suit next year, reports The Times.

However, Mark Carney, governor of the Bank, said in an interview in today’s Financial Times that the UK was in a “low for long” rate environment.

The survey results will give UK rate-setters some comfort as households are in a much stronger position to weather an increase than two years ago.

Thirty one per cent of 6,000 households claimed they would “need to take action” if rates rose to 2.5 per cent but pay stagnated, down from 37 per cent in 2014 and 44 per cent in 2013.

“Reported levels of financial distress are low and have declined a little further,” the Bank said.

“Households reported that they had more income available to meet any increase in mortgage repayments. The survey results do not imply that an increase in rates would have an unusually large effect on household spending.” Family finances have been helped by record low inflation, which ended six years of squeezed living standards.

Inflation edged back into positive territory last month at 0.1 per cent, from -0.1 per cent in October. Pay has been growing far faster than inflation, at 3 per cent, but is expected to drop to 2.5 per cent when today’s official labour market figures are released.

The Bank said that its survey scenario was not representative of true conditions. Rates are currently projected to increase from 0.5 per cent to 1.5 per cent by the end of 2018, and the Bank is forecasting real post-tax household income to grow by 2.25 per cent each year from 2016 to 2018.

If wages were 10 per cent higher by the time rates increased to 2.5 per cent, only 2 per cent of households would need to take remedial action, it said.

The survey found that rate rises would have a dampening effect on growth as borrowers would cut back much more sharply than savers increased spending.

“A 1 percentage point rise in rates is estimated to reduce aggregate spending directly by around 0.5 per cent as a result of redistributing income from borrowers to savers,” the Bank said.

Households have used the windfall from low inflation this year to improve their finances. “The proportions of households with high mortgage debt to income and debt-servicing ratios have fallen slightly,” the survey said.

Households surveyed had on average outstanding mortgage debt of £85,000 and £8,000 of unsecured debt.

Good conditions are predicted to stay, as falling oil prices keep inflation low. “Inflation is going nowhere fast”, Paul Hollingsworth, an analyst at Capital Economics said.

Signs that pay growth is waning may also delay a rate rise from the Bank.