Britain has learned nothing from the credit crunch says top economist
Britain could be mired in another crash in five years’ time if heavily indebted households and firms are crushed by higher rates, a top economist warned this morning.
Interest rates stand at 0.5 per cent, and the Bank of England does not expect to increase this for another year or so.
That will mean rock-bottom rates for six years, meaning borrowers will be so used to easy money that a rate hike could deal them a crushing blow.
“People are making decisions currently on basis of interest rates that are extraordinarily low by historic comparison,” BNP Paribas’ Paul Mortimer-Lee told MPs today.
“It worries me that this wont last, and that when we move back to normal times, the margin squeeze that OBR assumes between mortgage rates and bank rate wont occur. Therefore there will be an adverse shock to household income gearing and cash flow, as the debt built up at low interest rates has to be serviced at a much higher interest rate.”
“That is a real recession risk towards the end of this forecast period.”
The Bank of England has new tools to try to stop this – it can tell banks to stop lending to risky borrowers, or impose tougher criteria on mortgage loans – Mortimer-Lee, fears it may prove impossible to use these powers effectively.
“With all these things it is difficult to bring a decisive change in policy that can change dynamics of economy,” he told the Treasury Select Committee.
“You can only do this when you’re really really sure. And by the time you’re really really sure, it is often too late.”