Bank of England: Households will struggle to pay debts if interest rates rise

 
Jasper Jolly
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Households could struggle if rates rise (Source: Getty)

UK households could struggle to meet debt repayments if interest rates rise, according to the Bank of England, as it confirmed the conclusions of last week's financial stability report.

The Bank said "risk of a further sharp adjustment in fixed income markets remained” owing to the global economic environment.

The minutes of the bank's Financial Policy Committee (FPC) showed that “households' ability to meet debt repayments could be challenged” if unemployment rises significantly above eight per cent or household incomes fell.

The committee also said that using market yields – which provide an indication of interest rate rise expectations – to guide interest rate decisions would be “imprudent” in light of their sensitivity to news, such as the US election.

The minutes also confirmed that the FPC was satisfied that banks such as RBS, Barclays and Standard Chartered “now had plans in place to build further resilience” - despite the BoE's own tests showing that they could have their capital wiped out if economic conditions worsen.

RBS last week failed all of the BoE’s stress tests measures, indicating that the bank is deemed most likely to run out of capital in the event of another financial crisis.

However, it also said that the UK financial system had shown it can “dampen, rather than amplify, the impact on the real economy of a series of shocks”.

The Bank of England last week said that the main risks to the UK economy were outside the UK – including a potential Chinese credit crisis and the as yet unknown effects of Donald Trump’s election as US President.

Governor Mark Carney also called for a smooth transition for firms as the UK begins the process of leaving the EU, and said businesses need to know “as much as possible as early as possible” about the government’s negotiations.

The FPC was created in the wake of the global financial crisis to identify systemic risks in the UK financial system. It also has a mandate to aid government policy. It has been meeting since June 2011.

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