Major investors could face huge losses if they continue to be complacent about the impact of rising interest rates on their riskier trades, the Bank of England’s financial policy committee has warned.
The committee said in minutes of its latest meeting that many investors appeared to be overly relaxed at the prospect of rate rises, which could undermine investment policies devised in an era of cheap money.
The committee, which has responsiblity for monitoring the risks taken by the banking and insurance sectors, said that while borrowing remained low by historical standands, investors were shifting money around the world to take advantage of interest rates in complex trading patterns that could backfire.
The minutes said: “Nonetheless, members were concerned that there was a risk that this apparent resilience to past developments in advanced economy monetary policy could reinforce risk appetite in a way that did not fully take account of the eventual transition of monetary policy to more normal settings.”
The committee, which has previously warned of the potential impact of interest rates rising from their record lows, said the transition to higher rates could pose challenges in some sectors of financial markets. It said changes to the way banks are structured since the crisis made it more difficult to spot patterns of behaviour and judge what the impact of any surprises would be.
Recent analysis by the ratings agency Moody’s found that UK households would be resilient in the face of an interest rate rise, despite many homebuyers facing financial hardship in recent yerars.
Base rates are expected to start rising next year from the current 0.5% to around 1.5% a year later. The US Federal Reserve has also signalled that rates are likey to start rising in 2015, although, like the UK, they are expected to move up gently over a period of several years.
via The Guardian