Slow and steady on interest rate rises

Nia Williams

May 9, 2013

The CML said that a higher Bank rate – associated with higher lender funding costs – will affect the ability of borrowers to service debt. But the speed and circumstances in which the Bank rate rises will be crucial in determining the outcome.

Policymakers are aware that many households will only be able to manage slow and modest increases in borrowing costs.

In his evidence to the Treasury select committee earlier this year, the incoming governor of the Bank of England, Mark Carney, said: “To ensure the monetary policy committee retains adequate room to respond to the developments in economic conditions, it will be sensible for any tightening in monetary conditions to come about first through an increase in Bank rate that could, if necessary, be reversed easily.”

In its News & Views the CML said: “Most commentators agree that we are unlikely to see any tightening of policy until economic recovery is well established and some growth in incomes has been restored.

“What we have seen in the aftermath of the financial crisis is that that borrowers in aggregate tend to prioritise mortgage debt even when their real incomes fall. We would expect this to continue once the Bank rate begins to edge slowly upwards again in the coming years.

“The current picture is likely to change only slowly. We expect to see a steady increase in the number of transactions to more normal levels but this, like any increase in remortgaging, will only occur over an extended period.

“When the Bank eventually raises the official rate, it is also likely to do so slowly. Policymakers are alert to the potential impact of higher rates on household finances, and the Bank has said that it will approach this in steps that can easily be reversed if necessary.”

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