Households with high levels of debt will put consumers at greater risk in a potential economic downturn, the Bank of England has warned.
Banks were set to be forced to effectively save a combined £150 billion in capital next year, but the Bank of England's Financial Policy Committee (FPC) has now said it will delay those rules.
That means bank's will have an extra £150bn to lend to businesses. The Bank said it will help to combat the slowing growth that is expected in the rest of the year after the Brexit vote. And while greater lending is good for businesses, the Bank warned that an increase in lending to consumers would make consumers with high debt much more "vulnerable" to the effects of a recession.
In this post, economics blogger Michael Baxter says that, contrary to what Michael Gove had many believe, "the UK can be thankful it has experts at the Bank of England, because its seems that they are all that stand between the economy and recession".
The FPC said economic risks as a result of the EU referendum are already "materialising". As uncertainty grew in the early months of the year, the committee said the inflow of foreign investment in the commercial property market fell 50% in the first quarter.
The Bank said "the high level of UK household indebtedness [and] the vulnerability to higher unemployment and borrowing costs" following the a Brexit vote could leave many households unable to pay their bills.
It also warned that house prices could come under pressure, particularly if buy-to-let investors stop their investment.
Last week, governor of the Bank of England, Mark Carney, said interest rates would probably be cut from their already-record low of 0.5% and its quantitative easing package would be increased in July, as some of the first measures to support the economy.
He said: “It now seems plausible that uncertainty could remain elevated for some time, with a more persistent drag on activity than we had previously projected."
Mr Carney stressed that the Bank of England's decision on interest rates alone would not be enough to maintain economic growth or prevent a recession. He said: “As we have seen elsewhere, if interest rates are too low – or negative – the hit to bank profitability could perversely reduce credit availability or even increase its overall price.
“Monetary policy cannot immediately of fully offset the economic implications of a large, negative shock.
“The future potential of this economy and its implications for jobs, real wages and wealth are not the gifts of monetary policy makers.
“This will be driven by much bigger decisions; by bigger plans that are being formulated by others.”
On the morning of the referendum result, Mr Carney said the Bank of England was prepared to pump an additional £250bn into the banking system.