BoE economist warns of 'debt build-up'

Tuesday, 19 August 2003 12:00 AM

The Bank of England's chief economist, Charles Bean, has warned that UK consumers have been made vulnerable to future economic downturns by increased debt levels.

In a speech to the Reserve Bank of Australia's conference in Sydney he noted that there had been a "build-up of household debt", based largely on the improved access to credit that has accompanied the housing boom.

Mr. Bean noted that although this meant a cheaper rate of borrowing for many people - particularly with the historically low base rate of 3.5% - it did raise a legitimate concern "that borrowers may not have fully factored in the corresponding increase in future real payments".

Repayments would be a particular concern if interest rates started to rise again - something that could happen next year, according to some analysts.

But Mr. Bean also pointed out in his speech on factors affecting inflation, that even a sharp correction in house prices would not necessarily bring a reduction in consumer spending because people would spread the cost over the lifetime of the mortgage.

But if there were an unexpected additional factor such as unemployment there could be problems, he noted.

Pointing out that as many as a third of households have no liquid assets, he claimed that job losses would mean families would have to "cut back spending in line with their reduced income".

"The impact of this adverse shock on aggregate consumption will be greater, the higher is the fraction of constrained households," Mr. Bean noted, adding that the greater the individual debt, the worse the situation would be.

In the UK now there are also concerns that many homeowners - particularly first-time buyers - are overstretched and could struggle to repay their mortgages, let alone cutting back on their other monthly outgoings, if economic conditions changed.

The new governor of the Bank of England, Mervyn King, echoed concerns about increasing debt last week. And back in June, the bank reported that UK consumers borrowed nearly £10bn, a record rise of 14% on the previous year.

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