House prices are at record highs. Consumer credit rose over 10% in the year to April. The household debt-to-income ratio is 140% – not far off its historical highs. Asset markets are bubbling a bit. Pretty much everyone in the UK drives a new car paid for on the never-never. The savings ratio plumbs new depths. Inflation has just hit nearly 3% – so anyone getting the base rate only of 0.25% on their savings is losing 2.75% of their money to inflation every year (before tax!). Worse, about a third of savings accounts pay under 0.25%. And academic papers are suggesting that low interest rates might be playing a nasty part in the UK’s productivity problem.
So assume that you are in charge of the Bank of England (with a clear mandate to keep inflation at 2%) and you are old enough to remember what happened to the economy in 2007/2008. What do you do? To most of us the answer would be obvious. You’d recognise that most of the problems listed were a direct result of your policies and you’d raise interest rates. Sadly, you aren’t in charge. Mark Carney is – and he and his team don’t seem to be quite ready to make the move.
It isn’t that the Bank can’t see the consumer-credit crisis rolling towards us. This week’s Financial Stability Report made it clear that it does. It has asked the banks to increase their “countercyclical capital buffer” by a tiny bit (£11.4bn between them) so that they have more set aside to absorb losses should high inflation and low wage growth mean more borrowers end up having trouble paying back their debt. It has noted that banks have been making riskier loans (cutting the rates they charge and hence their margins too).
It is also bringing forward its analysis of how banks would cope with huge losses in the consumer-credit sector. However, recognising that a problem exists and being brave enough to do something about it are clearly two different things. The rise in the buffer doesn’t take full effect until 2019. No significant policies have been brought in to rein in credit – there was some minor tightening up of mortgage affordability rules, but overall it was small beer. And, while more members of the Monetary Policy Committee (MPC) are getting nervous about inflation, they just aren’t putting rates up.
We all get by now that the easiest way for the UK to deal with its debt overhang is to try to inflate away its real value by keeping interest rates lower than inflation. But if all keeping the base rate at 0.25% does is encourage us all to take out more debt, it is turning into a very dangerous game. At a summit organised by The Times this week, DeAnne Julius, a former MPC member, noted that “if this isn’t the time to raise rates I don’t know when will be”. Bar the five MPC members who voted to keep rates on hold at the last meeting, I suspect no one does.