Monday 30th April, 2007 

The jump in consumer price inflation in March to 3.1 per cent could lead to a significant increase in bad debt and mortgage repossessions according to new analysis from Business Strategies, Experian's independent global economic consultancy.

"The rise in inflation heralds a further increase in interest rates to 5½ or even 5¾ per cent, with even more increases on the way" comments Dr Neil Blake, Managing Director of global economic forecasting at Business Strategies. "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 will also need to consider carefully their future circumstances when assessing their financial position. Rising bills coupled with the existing and possible future interest rate rises should be taken into account by borrowers."

Analysts at Business Strategies have looked at the implications of different levels of interest rates on both the economy as a whole and on bad debt. The first scenario, reveals that with interest rates staying at 5¼ per cent, both GDP and household spending growth is expected to slow in 2008 and remain broadly stable in 2009. Even with no interest rate increases, however, two measures of financial stress, the published write-off rate for unsecured debt (mainly personal loans and credit cards) and mortgage repossessions, deteriorate significantly. With stable interest rates, the unsecured debt write-off rate is predicted to reach 4.1 per cent by 2009, which would be the highest rate since 1992, and repossessions are predicted to reach 38,900, which would be more than a doubling of the 2006 figure and the highest level since 1996.

Dr Blake comments: "This is a result of the current and predicted levels of debt relative to income in the UK and the impact of the increases in interest rates that have already happened. Even if interest rates fall back in 2008, as the current Business Strategies published forecast suggests, write-off rates and repossessions are still expected to continue increasing until 2009. Any further interest rate rises are bound to add further to future levels of financial stress."

"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. "

"Too big an increase in interest rates could easily push the economy over the edge, leading to a situation where consumers lose their appetite for spending and banks lose their appetite for lending growth altogether. This scenario would almost certainly push the UK economy into recession, leading to an overshooting of the inflation target being replaced by an under-shooting. This is an outcome that is in nobody's interest and is one that the MPC and the industry will be working hard to avoid."