Policymakers at the Bank of England will act “sooner rather than later” to manage the risks posed to the UK’s financial stability by growing household debt, Sir Jon Cunliffe has said.
In a speech made in London the deputy govenor of the Bank of England said the high level of debt to income made the UK vulnerable to shocks.
He said: “We are now back to early 2000s levels of debt to income and income gearing. Household balance sheets, however, remain large by historic standards.
“The position is sensitive to the unwinding, were it to occur, of some of the forces that pushed rates down over the past 40 years.
“And of course we remain vulnerable to the resumption of the rates of credit growth, driven by the housing market, seen in the 10 year upswing of the last cycle.”
Sir Jon said that credit is broadly growing in line with GDP and that if it were to resume growing more than twice as fast as GDP, it could take a number of years for debt to income to retain its pre-crisis peak.
He said: “But just as financial cycles build up over a number of years, the risks they pose are perhaps best managed over time.
“Given the vulnerability that already exists and the powerful drivers in the UK, particularly the housing market, if credit began again to grow faster than GDP, I would want to think about action to manage the financial stability risks sooner rather than later.”
Despite this Sir Jon warned against thinking of all debt as bad, saying society would be “much less congenial” if the credit to GDP ratio were at its 1880 level of 16 per cent.
He said: “The issue rather is what are the financial stability and broader economic risks for the UK if credit consistently grows faster than GDP and as a result debt to income resumes its upward path? That cannot continue indefinitely.”
In 2014 Bank of England governor Mark Carney said household debt would be a key consideration in any eventual increase in rates.
Last year research by the Building Societies Association found more than half of borrowers say they will struggle or fall behind with mortgage repayments when interest rates rise.
