Bank of England fears rate hike could send assets topsy turvy

Tim Wallace
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Donald Kohn says there is an outside chance that markets are not yet prepared for a rate hike
INVESTORS must be prepared for an increase in interest rates in the UK and across the world, or risk market chaos when the hike happens, Bank of England policymaker Donald Kohn said yesterday.

Kohn fears that investors have surged into risky assets in a search for yield – exactly as very loose monetary policy was designed to encourage them to do.

But if they are not ready for a rate hike, they could be over exposed to these assets, said the Financial Policy Committee (FPC) member, who expressed concern over potential financial instability.

“The question is whether the long period of low rates and low volatility has led to a mis-pricing of risks through reaching for yield, herding, or other types of behaviours,” Kohn told a British Bankers’ Association event.

“If it has, the potential for very sharp adjustments would be higher, with possible unanticipated consequences for both borrowers and lenders.”

And this could result in a vicious spiral of rates rising up and up, he warned.

“A sudden surge in longer-term rates – snap-back risk – could cause bond investors to pull back, exacerbating the rise in long-term interest rates,” Kohn said.