Bailey: Household finances ‘nowhere near as stressed’ as during financial crisis
The UK economy is withstanding the pressure from higher interest rates to a far greater degree than expected, Andrew Bailey, governor of the Bank of England said today.
Speaking in the Treasury Committee, Bailey said households and businesses were “nowhere near as stressed as during the financial crisis period”.
He pointed to a couple of mitigating factors which had protected households from the rise in interest rates.
“We have not seen a pronounced increase in unemployment…Historically one of the main drivers of loan losses, particularly in the mortgage market,” Bailey said.
He also pointed out that households had seen around a two per cent increase in real household incomes over 2024 as inflation has eased and wage growth has remained high.
“Both of those things support overall conditions and financial stability,” he added.
This means that both household borrowing and the mortgage market were experiencing “less stress”.
Interest rates in the UK have increased rapidly from near zero to a post-financial crisis high of 5.25 per cent. This has put up mortgage rates, forcing millions of households to pay hundreds of pounds more every month.
However, unemployment has remained historically low at 4.2 per cent. Although data from the Bank of England shows that mortgage arrears hit a six-year high in the three months to December, this was up from historically low levels and remains well below the peaks of the financial crisis.
The figures showed 1.14 per cent of total loans were in arrears, compared to 3.64 per cent in the first quarter of 2009.
Despite his relatively sanguine perspective on the UK economy, Bailey noted that “there are people who are experiencing very difficult times in this country”.
Other members of the Bank’s Financial Policy Committee (FPC) argued that complacency about whether the relatively benign economic environment would remain was a major risk to financial stability in the coming year.
Jonathan Hall, an external member of the FPC, said a major risk was “exuberance” given that economic volatility was now declining.
He noted that credit spreads are tight, indicating bullishness, while equity markets, particularly in the US, are very strong. Markets are “taking on more risk because they think the environment is more benign,” Hall said.