BoE's Haldane: Rise In Long-Term Interest Rates Would Hit Borrowers Hard

Sponsored Links

U.K. borrowers would face another blow, if long-term interest rates return to a more normal level, the Bank of England Financial Stability Executive Director Andrew Haldane said Wednesday.

But, U.K.'s mounting debt levels suggests that the BoE is unlikely to hike the rates in the near future. Haldane said the debt position of the financial sector, households, companies and sovereigns paints a sobering picture. He pointed out, citing McKinsey research that U.K. debt ratios rose to around 450% of GDP by 2008, more than double compared to 200% in 1990.

A normalization of long-term interest rates would increase U.K. companies' debt servicing costs from 17% of profits currently to around 33%, he said.

The central banker said to date, servicing these debts has been cushioned by policymakers' actions. "Government debt and equity have substituted for private debt and augmented private equity to support impaired balance sheets, especially among financial firms: a third of capital raised by banks since the crisis began has come courtesy of government," Haldane said.

"Through monetary measures, interest costs have been lowered dramatically: debt servicing has fallen, often dramatically, across many sectors."

Further, he said extraordinary policy measures have acted like a painkiller for debt problems. But, painkillers offer only temporary relief. "Loans from government to repair balance sheets need ultimately to be repaid. And monetary stimulus will need ultimately to be withdrawn."

"Public policy can act as a balm for debt problems, not a long-run cure."

(Market News Provided by RTTNews)