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UK debt boom bigger than the 1980s, says Fitch

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A boom in consumer credit has seen UK households now borrowing more than they are saving, for the first time since the 1980s, according to a leading credit rating agency.

This last happened in the ‘Lawson boom’, 30 years ago, when Nigel Lawson was chancellor of the Exchequer. There has been a huge swing over the past year from saving to borrowing, said Fitch.

The group said there were two main factors behind the trend: greater residential investment and lower private pensions savings relative to income. It added that the UK household sector’s worsening financial health reduces consumer resilience to income or interest rate shocks, while also presenting risks for UK consumer loan portfolios.

However, the amount that consumers are paying to service their debts hasn’t risen because interest rates have stayed low. Fitch said that the effective interest rate on all UK household debt fell to 3.3% last year. The fall in the effective interest rate has saved household borrowers £20bn-£25bn in interest payments since 2009.

The group said: “A major interest rate shock appears unlikely (we forecast the UK base rate to rise gradually, to 1.25% by end-2019), but a more immediate shock could come from tightening credit supply. The impact of the Brexit referendum on real wages may be fading, but Brexit uncertainty creates risks of a bigger shock to growth and employment.”

The Bank of England makes its decision on interest rates this week. It had been widely expected to raise rates by 0.25%, but recent weak GDP growth, inflation and business statistics have made a rise less likely. Even if the Bank of England chooses to raise rates this week, most economists expect this to be ‘one and done’, with no further rises for the rest of the year.

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