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Summer 2015 is the new target date for the UK’s first trip up the interest rate escalator. There were many City economists who expected next month or February next year to be picked by Bank of England policymakers, but the minutes of the October meeting have forced them to rip up those forecasts.
So, mortgage payers can breath easy for a few more months. And if that means opening their wallets, it could keep the recovery on track.
But will they open their wallets, or has the constant “will they, won’t they” debate persuaded everyone with sizeable mortgage debts to play a cautious hand?
The supermarkets certainly think caution is the watchword of most shoppers. The price war hitting their profits is born of austerity shopping still dominating the high street six years after the crash.
Several thinktanks have warned that debts play a bigger part in limiting disposable incomes than previously thought.
A Resolution Foundation report found that the number of people using more than half their disposable income to repay debt could rise from the current 600,000 to 1.1m by 2018 if interest rates rise to 3%.
We don’t know how far more expensive mortgage rates would push up the pace of home repossessions. But we do know that unsecured debts have already begun to climb: in 2000 the insolvency rate in Britain was just 7.4 per 100,000 adults. Now it is 22.8 per 100,000 and rising.
The insolvency trade body R3 found in a recent survey that just 47% of British adults are in debt and a third of them – around 15% of all UK adults – owe money to five or more organisations.
Given that the UK’s personal debts add up to £1.5tn, R3 said it was worrying it was concentrated in so few hands.
The indebted group congregates in the 25-45-year-old bracket. This generation (late X and early Y) must increasingly carry the burden of student debt alongside family responsibilities and a mortgage on an overpriced home. They might have expected higher pay to cope with this burden, but as we know, most have suffered a squeeze. Hence the credit cards, store cards and car purchase agreement.
These groups spent freely after Carney gave his forward guidance that rates would remain at rock bottom levels until 2016 at the earliest. It may not have been written in blood but was taken as such by the public and convinced many consumers it was safe to spend without worrying about their debt financing.
When Carney said earlier this year that forward guidance would be refashioned into monthly guidance, there was bound to be a slowdown. Maybe the Bank’s latest 7-2 vote, which entrenches the dovish majority, will entice consumers out of their shell. It seems unlikely. The message is not clear enough.
