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BOE won’t go aggressive on interest rates to avoid property crash

Stefano Fugazzi (ABC Economics) – Do not expect Bank of England to rush into any significant base rate increase in the short to medium term. According to the Old Lady’s Monetary Policy Committee the main reason for delaying any rate hike is largely due to “low inflation”. However, ABC Economics believes that instead the main reason for not increasing rates is due to fears to fuel the bust of the residential and commercial property bubble.

Why? To put it simply: British households are sitting on a pile of private debt, particularly if you consider that a large proportion of the stock of UK mortgages is on variable rates.

chartA

The picture becomes even gloomier when you take into account that debt levels of households and private non-financial companies in the United Kingdom are high, at around 165% of GDP.

uk chart1

Should Bank of England significantly raise rates or should the British economy go into recession (and salaries shrink), it likely to see a shift to right in the table below which shows the distribution of mortgage debt by household indebtedness.

uk chart2

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