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.