Higher interest rates: How will you prepare?

Picture1 Interest rates will rise
With the UK economy improving the need for supportive monetary policy from the Bank of England in terms of quantitative easing (QE) and a 0.5% base is diminishing rapidly. The short-term outlook for interest rates is now a matter of great debate, with many analysts expecting a rise in Bank Rate towards the end of this year or early next. The MPC has made clear that once rates do start to rise, they will rise only gently with the eventual ‘normal’ level of Bank Rate settling at a lower level than the pre-recession 4.5% to 5%. Of course, there are a number of economic and financial risks out there that mean that interest rates could go up faster and by more than can be reasonably expected over the next 12-18 months.

What is the impact on affordability?
One of the key features of the economic recovery is that households have yet to feel the benefits of the economic upturn as growth in wages and incomes remain very weak. In real terms incomes are still lower now than they were pre-Lehman, and of course some customer segments and some local economies have been affected more adversely than others. Prospects for wages are poor as productivity growth remains weak and if interest rates rise before there is evidence of a sustained recovery in incomes, then affordability issues will become more severe for more indebted borrowers, as higher interest rates will raise debt servicing payments and the effect will be compounded the faster that interest rates increase. Expectations are for real disposable incomes to rise only modestly over the coming 12-18 months. Of course there are those who will benefit from rising rates, most notably net savers who were those that suffered during the immediate aftermath of Lehman when interest rates collapsed.

More than ever it is time to evaluate the potential impact
So what on the face of it is excellent news over the economic recovery comes with a huge sting in its tail, as this will ramp up affordability pressures on borrowers since interest payments rise across the retail product suite. Have you planned for alternative interest rates scenarios? Do you know who will be affected the most? How much is at risk? Will your products still be fit for purpose when rates do rise?

To find out more contact us on economics@experian.uk.com