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Closer to the Edge? Prospects for household debt repayments as interest rates rise

11th July 2013

Matthew Whittaker

The number of families in Britain with perilous levels of debt repayments could more than double to 1.2 million if interest rates rise faster than expected in the next four years and household income growth is weak and uneven. The figures suggest that the ongoing squeeze on households could leave Britain seriously exposed if interest rates were to rise faster than expected, resulting in levels of debt back at the heights last seen in the run up to the financial crisis.

In this slidecast the Resolution Foundation's senior economist, Matthew Whittaker, sets out the first full analysis of how rising interest rates could affect families under different scenarios for the recovery in household incomes.

They follow from the adverse but plausible scenario in which interest rates rise to 3.9 per cent by 2017 (two percentage points higher than current market expectations but still below typical long term levels) and household income growth is weak and uneven (lagging behind GDP growth and being skewed away from less affluent households).

New Bank of England governor Mark Carney has signalled an intention to hold down interest rates for longer than otherwise may have occurred—and this report confirms the risks of an early rise. Yet with few able to say with confidence what interest rates will be in 2017, the findings also stress how little freedom for manoeuvre the Governor and Monetary Policy Committee may have if the squeeze on household incomes continues and external factors—or a domestically generated housing boom—generate pressure for higher rates.

An extended version of these slides with full notes and methodology (no commentary) is available below.

 

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Closer to the Edge - Extended version

11 July 2013
File type: pdf | Size: 1.4 MB


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