UK consumer debt growth shows economy ‘ready’ for higher rates

MPC’s Gertjan Vlieghe says multiple rises needed in next 3 years to remove excess demand.
Rapid growth in UK consumer debt supports the case for higher interest rates, a member of the Bank of England’s Monetary Policy Committee said on Monday. Gertjan Vlieghe, a former economist for the hedge fund Brevan Howard, said consumers’ increased willingness to borrow and spend showed that “the economy is ready for somewhat higher interest rates”.
Mr Vlieghe was once seen as the central bank’s “uber dove”, but first came out in favour of increasing interest rates last autumn. At the time, Mr Vlieghe argued that higher growth in borrowing showed low interest rates were providing more support to the economy than when households were saving.
In November, the MPC voted to raise interest rates for the first time in a decade, raising its benchmark by a quarter of a percentage point to 0.5 per cent. Last week, the MPC suggested it would raise interest rates earlier and faster than previously expected to combat rising inflation.
On Monday, Mr Vlieghe said “a bit more than” three rate hikes in the next three years would be necessary to get rid of excess demand in the economy. He added: “It really depends on how the economy evolves.”
Mr Vlieghe said rising household debt was a matter for regulators, but the rate-setting MPC should take notice “as underlying inflation pressures are starting to build”.
“By their actions, households are telling us that at current interest rates, at least, they no longer want to ease debt burdens,” he said.
He added that when factoring in stronger global growth and tighter labour markets, “a rise in borrowing rates can be sustained”.
Mr Vlieghe was speaking at an event run by the Resolution Foundation to mark the think-tank’s latest report that examined the role of debt in modern Britain.
Asked whether the UK economy was a “Ponzi scheme”, Mr Vlieghe rejected the characterisation, but said: “Undoubtedly at some point we will have another credit bust.”
He said the big policy mistake before the last financial crisis was regulation being too loose, rather than interest rates too low. However, he said that stricter regulation, which is the purview of the BoE’s Financial Policy Committee, was a “substitute” for action by the MPC, and the “policies mutually influence each other”.
Mr Vlieghe pointed to steps the FPC had taken in 2014 and 2016 to constrain risky mortgage lending as examples of the kind of policies that could safeguard financial stability. In 2014 Mark Carney, the governor of the BoE, said the central bank would cap the proportion of large mortgages that a bank could issue and would make banks check new borrowers would be able to afford their loans if interest rates rose 3 percentage points over the first five years of borrowing.
The Resolution Foundation report showed that two risky pre-crisis kinds of mortgage were now virtually non-existent in the UK. Loans of more than 95 per cent of the value of property have “all but disappeared”, the report said, while the proportion of mortgages advanced without any verification of the borrower’s income has fallen from 46 per cent in 2007 to less than 1 per cent in 2017.
However, the think-tank found that this improvement in lending standards may have created a group of “mortgage prisoners” who have little equity in their homes and cannot refinance their debt. They account for about 11 per cent of mortgage holders, according to the think-tank.

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