A new report finds that while UK households look relatively well-placed to cope with an interest rate hike, policymakers have to account for lower income households that are already struggling to pay off their debts.
Last week, the Bank of England signalled that an interest rate hike could happen as soon as in May, and at the same time levels of consumer credit have risen at just under 10% over the course of last year. If interest rates go up at the same time, mortgage debt and other unsecured debt – car loans, credit cards and personal loans – would get more expensive to pay off.
The Resolution Foundation report shows the cost of servicing Britain’s household debt is low by historical standards, with repayments currently accounting for 7.7% of disposable income. This is well below the 12.3% recorded just before the financial crisis, and in line with the level seen during the mid-1990s and early 2000s.
But many other factors are squeezing households’ disposable incomes at the same time. Spending increased more rapidly than income growth in 2017, with the biggest spending rises taking place among lower income households while inflation continues to erode savings.
Many households display signs of "debt distress", according to the report. Around three in ten working age households show at least one sign of debt distress, including 21% who have had difficulty paying for their accommodation and 17% who find unsecured debt repayments a heavy burden.
Matt Whittaker, chief economist at the Resolution Foundation, says: ‘Rapidly rising consumer credit and the prospect of faster interest rate rises have led some to warn loudly of the imminent bursting of another credit bubble. But these fears appear to be overblown, with much of the recent credit growth being driven by higher income households who are much better placed to service their debts.
"While the evidence shows that on the whole Britain is well prepared for future interest rate rises, policy makers must have regard for those low income households who are already struggling to pay off their debts, and who could be really exposed if interest rates go up faster than currently expected."
This article first appeared on our sister webstie Money Observer