Credit boom will leave households vulnerable when rates rise

AN INTEREST rate hike could leave over-leveraged households short of money, S&P Global Ratings has warned.

A report by the credit ratings and research agency found consumer lending across the world’s developed countries reached $29.6trn (£22.6trn) at the end of the first quarter of 2017, about $2trn greater than around the start of the financial crisis in the first quarter of 2007. Continued low interest rates have aided the consumer credit boom, it said.

S&P used data from the Bank for International Settlements that showed the amount of income being set aside to repay debt. In the UK, this figure was at just under 14 per cent and dropped to just under 10 per cent at the end of 2016.

This may become a concern amid increasing speculation of an interest rate rise in the UK, with the Bank of England’s Monetary Policy Committee meeting next week.

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“Low global interest rates have helped facilitate consumer debt in the wake of the financial crisis,” S&P said.

“As the global economic recovery continues into its eighth year, consumer loan balances have continued to rise in many of the world’s developed economies. Many would suggest that accelerating levels are somewhat of a callback to 2007, when consumer leverage hit its tipping point.

“Many factors, such as economic growth and interest rate levels, help determine the consumers’ capacity for leverage. However, such a pronounced acceleration in consumer debt growth begs the question of when too much debt poses a systemic risk to the global economy and specifically to structured finance products.”

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