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Interest rate rise uncertainty growing

Rate rise would put millions of Britons in 'perilous debt', says think tank, but Bank of England says significant rises not needed following drop in unemployment rate

The pound has reached its strongest point against the euro in a year following the fall in UK unemployment rate, but Mark Carney believes an interest rate rise is not required

Last year, Mark Carney, Bank of England governor, said interest rate rises would be considered once unemployment fell to 7%

Uncertainty surrounding how soon the Bank of England will increase interest rates has been mounting since the Office for National Statistics (ONS) announced that unemployment rates fell to 7.1% for September to November 2013.

Back in August 2013, Bank of England governor, Mark Carney said that he would tie interest rates to the country’s unemployment rate.

As a result, the Bank of England would only consider an interest rate rise once unemployment rates fell to 7% or below.

The announcement from the ONS last week, however, has raised doubts over earlier predictions that the unemployment rate would only reach the 7% threshold as late as 2016.

‘Perilous debt’ looms if rates rise

Analysis by independent think tank, Resolution Foundation, has claimed that up to two million Brits could face ‘perilous debts’ by 2018 should rates rise significantly from 0.5% to 5%.

The analysis classifies perilous debt as the need to spend more than half of one’s disposable income on debt repayments.

Should rates rise to the more optimistic figure of 3%, then the number of those in perilous debt would still increase to just over one million.

Matthew Whittaker, senior economist at the Resolution Foundation, said: “Even if we take a somewhat rosy view of how the economy will develop over the next few years the number of households severely exposed to debt looks as though it will double.”

Meanwhile, chief executive at the Resolution Foundation, Gavin Kelly, believes “there is little sign of the political or financial establishment giving this the priority it deserves.”

No cause for alarm, says Carney

Despite the warnings, Mr Carney, speaking to BBC Newsnight at the Davos World Economic Forum 2014, said that there was “no immediate need to increase interest rates.

Mr Carney was also keen to play down the role of unemployment rates in deciding the bank rate as it’s “really about overall conditions in the whole labour market”.

The Bank of England’s reassurances may hold off debt panic for now but the unemployment rate drop is unlikely to dissuade the market from believing that an interest rate rise is on the horizon.

On Wednesday, the currency market responded to the UK’s unemployment rates, helping the pound reach its strongest position against the euro in a year.

Many consumers will be hoping that mortgage lenders and other credit providers do not pre-empt a bank rate rise with their own increases but with unemployment rates almost at the 7% threshold it may be difficult for the Bank of England to hold off even a gradual rise in interest rates.

  • Lesley T. Hinton

    But Alan Clarke, director of fixed income strategy at Scotiabank, said unemployment could drop below 7% – the rate that would trigger a re-evaluation of interest rates – well before the Bank of England expects.

  • John Yates

    Its a pity that living within ones income, something I did from an early age is no longer understood.If I could save,get a mortgage, fund a pension and not buy things I didn’t need and couldn’t afford why is this no longer possible?
    I was never rich but managed to travel a bit, buy property and increase my savings. Sadly its no longer worth saving when the interest rates are lower than the cost of living index… I am also risk averse and a pensioner!

  • Thomas

    All a bit alarmist. That the BoE committed itself to no rate rises before the unemployment rate fell below 7% is unprecedented since BoE indepence. It was to attempt to lower expectations of future interest rates which has the effect of lowering the real (rather than nominal) interest rate in the present by impacting on agents’ actions today. Just because unemployment MAY fall below 7% soon doesn’t imply interest rates will rise (necessary isn’t sufficient).
    Interestingly, articles like this predicting a rate rise will raise expectations of future interest rates thus increasing the real interest rate today. The article mentions this with sterling. If this happens, theoretically the BoE won’t need to raise exchane rates: agents will have enacted the effects of it anyway (higher sterling, fewer mortgages, lower consumer spending due to higher savings and less debt).