Interest-Rate Increases Would Exacerbate Debt Challenges, BOE’s King Says

Bank of England Governor Mervyn King said high debt levels pose “massive” economic challenges that would be exacerbated by increased long-term interest rates.

“The economic consequences of high-level indebtedness now would become more severe if rates were to rise,” King said yesterday at a committee of the European Parliament in Brussels. “It is the main reason why interest rates are so low.” King, who is vice-chairman of the European Systemic Risk Board, was commenting on challenges faced by the global economy.

Bank of England policy makers are split four ways over monetary policy. The central bank probably will leave the key interest rate at a record low of 0.5 percent at the next rate meeting on May 5, according to the median of 43 forecasts in a Bloomberg News survey of economists.

Last month, policy maker Andrew Sentance voted for an increase to 1 percent, Martin Weale and Spencer Dale for a quarter-percentage-point rise and Adam Posen for expansion of the bond-purchase program. The rest of the nine-member Monetary Policy Committee, including King, voted for no change.

The pound fell 1 percent to $1.6488 at 10:52 a.m. in London. The yield on the 2-year government bond fell 14 basis points to 1.038 percent.

“The problem of leverage, the sheer volume of debt in the economy, is still very large and this poses massive macro- economic challenges,” King said. “I think these macro-economic challenges will last many years.”

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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