Reeling In The Debt
As a nation of borrowers awaits the interest rate decision announcement from the Bank of England’s Monetary Policy Committee tomorrow, not one but two of the big four high street banks in the UK have announced that they can no longer afford to wait for interest rates to curb borrowing and are about to tackle the situation themselves. First HSBC and now Lloyd’s have announced that the rocketing levels of bad debts in the form of Bankruptcies and Individual Voluntary Arrangements are costing them too much, and that they will be forced to tighten their lending criteria to control the situation.
The effect of this, similar to interest rate rises, will be to curb borrowing amongst consumers, as high street banks will begin to offer less loans and overdrafts to people, slowing the vast supply of cheap money that has fuelled consumer spending in recent times. The banks simply can no longer afford to risk their profits by lending money out so easily. Considering that HSBC in particular has seen costs due to bad debts increase by 36% in the first 6 months of 2006, it’s not hard to see why this move has been made. Effectively the banks are taking matters into their own hands and doing the MPC’s job for it.
Further evidence of high inflation has been reported today by the British Retail Consortium, who have announced that shop prices rose at their fastest rate for two years in July. Some might say that this could tip the MPC into raising rates tomorrow, although they have ignored bigger problems in the past. Odds on a rate rise briefly hit 4-1 on Betfair today, although a rate freeze is still seen as the most likely outcome. It really is anyones guess.
