According to analysis from Experian, further interest rate rises, combined with a March’s rise in consumer price inflation to 3.1%, could lead to an increase in bad debt and repossessions.
According to Experian’s MD of economic forecasting, DR Neil Blake:
Not only will interest rate increases have a dampening impact on economic growth and inflation but there will also be a likely knock on impact on bad debt.
“This is something that lenders will be well aware of, but many consumers also need to consider their future circumstances carefully when assessing their financial position. Rising bills coupled with the existing and possible future interest rate rises should be taken into account by borrowers.”
Experian has been looking at the possible consequences of different levels of interest rate rises, both on the economy in general, and on bad debt.
According to its calculations, if interest rates remain at 5¼%, both GDP and household spending will slow in 2008 and remain stable in 2009. However, the write-off rate for unsecured debt and mortgage repossessions two measures of financial problems will worsen.
If rates stay at this level, the unsecured debt write off rate is predicted to hit 4.1% by 2009, which would be the highest level since 1992, while repossessions will reach 38,900 per annum, the highest since 1996.
Dr Blake issued a warning for the Bank of England, which will decide whether or not a rate rise is necessary:
“The Monetary Policy Committee has to take into account the potential impact on financial stress when making its interest rate decisions. Our analysis shows that we might not be that far away from record, or near record, highs for write-offs and repossessions and it is fair to say that how consumers and financial institutions will react at those levels of stress is not yet fully understood.”