Performance papers

BOE's Cunliffe says there's a case for MPC action if credit grows faster than GDP

BOE's dep gov for financial stability Sir Jon Cunliffe up to the rostrum

GBP finding a bit of comfort on the news but all got to be kept in context.

  • wouldn't bet on a rise in sustainable credit/GDP
  • household balance sheets are large by past standards

Somewhat takes the sting out of the header and supports my long held view that household debt is/should be a major issue/concern for the BOE.

Cunliffe is also a member of the MPC, FPC and PRA and is speaking at the British Property Federation Annual Residential Investment Conference on London

GBPUSD back to 1.4430

His conclusion:

"Since the 1980s the UK has seen a sharp and very material increase in the credit to GDP ratio and in the stock of household debt relative to income. This was particularly pronounced in the 10 year upswing of the last financial cycle when credit grew over twice as fast as GDP.

This surge in credit did not finance an economic boom. Indeed, it showed little in the conventional indicators of economic activity. It comprised in the main secured lending to households for housing, driven by house prices rising consistently faster than earnings.

The rise in secured debt and the increase in house prices reflected in part structural reductions in interest rates. Many of the forces that pushed down on rates over the period are long lasting and are unlikely to be reversed. To that extent, they have probably raised the sustainable level of credit to GDP. However, it would, in my view, be unwise to bet on further upward structural shifts in the level of sustainability.

The high level of debt to income made the UK vulnerable to shocks as we saw in the post crisis recession. There was a major correction following the crisis that has improved sustainability. We are now back to early 2000s levels of debt to income and income gearing. Household balance sheets, however, remain large by historic standards. The position is sensitive to the unwinding, were it to occur, of some of the forces that pushed rates down over the past 40 years. And of course we remain vulnerable to the resumption of the rates of credit growth, driven by the housing market, seen in the 10 year upswing of the last cycle. Trees cannot in the end grow to the sky.

The debt stock of course tends to change relatively slowly. Credit is growing broadly in line with GDP. If it were to resume growing more than twice as fast as GDP, it could take a number of years for debt to income

But just as financial cycles build up over a number of years, the risks they pose are perhaps best managed over time. Given the vulnerability that already exists and the powerful drivers in the UK, particularly the housing market, if credit began again to grow faster than GDP, I would want to think about action to manage the financial stability risks sooner rather than later."

Full speech here

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics


Latest Markets Videos