The Bank Gets Nervous: Personal Debt Fears

The Bank of England’s Financial Policy Committee is worried, with due cause, at the ballooning level of personal debt, which risks turning into a disaster in the event of a change in the economic climate. There is no doubt there are storm clouds on the horizon, but there is no agreement on the direction of the wind. It could blow the storm towards us or it could blow it away. It is the Bank’s job to prepare for the worst.  Loan companies and banks are being told to beef up their capital reserves to cushion against the toxic combination of defaults on payments due and a plunge in the value of the underlying assets. Renewed stress tests will be introduced.

All this is reassuring at a time of unprecedented political uncertainty with a Tory government propped up by the semi-toxic DUP and, if that were not bad enough, in a state of civil war both within the cabinet and in the parliamentary party. On the biggest issue of the day, Brexit, there is no agreement about which form of it to aim for. There is most likely a majority in the Commons for an economy first, jobs priority, soft Brexit, but to achieve that the government would have to bust apart and the Tory party, both in the country and the Commons, to implode. This is not the kind of political scenario that Central Bankers like. Interest rates would have to rise and quite fast.

And at that point the folly of waiting so long to make the first move will become apparent. Maintaining, year after year, the lowest  interest rate since the 1690s will exact a price for which few are fully prepared.