Thu 31st May, 2007
Inflation Set to Increase Bad Debt
March’s inflation increased to 3.1 per cent which is set to trigger increases in bad debt and house repossessions according to figures from Experian’s independent economic consultancy.
“The rise in inflation heralds a further increase in interest rates to 5.5 or even 5.75 per cent, with even more increases on the way,£ comments Dr Neil Blake, Experian’s Managing Director. “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.”
Dr Blake continues: “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.
“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.”
The entire financial community is set on edge to see what happens. Companies that issue bad debt loans and debt consolidation loans may continue to enjoy unheard of profits, while banks pick up the losses. In the end, the consumer is expected to be the biggest loser.