The key chart
The key message
A “significant monetary policy response” from the Bank of England poses an equally significant risk to the Bank’s relatively sanguine view of household debt affordability and financial stability, expressed less than 90 days ago.
In its July 2022 “Financial Stability Review” (FSR), the Bank of England forecast that the share of UK households with high, adjusted debt service ratios would increase in 2023, but “would remain significantly below the peaks seen ahead of the GFC.”
In response to questions at the FSR’s launch, Sir Jon Cunliffe, the Deputy Governor for Financial Stability, indicated that rates would have to rise significantly (200-500b) above current market expectations for the bank rate (3% at the time) for the share to reach previous highs (see “Financial inequality and debt vulnerability.”).
Fast-forward a mere 85 days and Huw Pill, the Bank’s chief economist, is suggesting that the Bank is likely to deliver a “significant monetary policy response” to protect sterling and fight rising inflation. Some financial market participants are arguing already that interest rates could reach 5.5% to 6% in 2023. In response, some UK mortgage lenders are pulling mortgage deals, citing the lack of certainty on how far interest rates may have to rise.
More importantly, if the latest market forecasts and the Bank’s earlier debt vulnerability forecasts turn out to be correct, rates will reach the levels at which the share of households with high, adjusted debt service ratios – those who are typically likely to struggle with debt repayments – could return to pre-GFC highs in 2023.
Please note that these summary comments are abstracts from more detailed analysis that is available separately.