The vulnerability of the more heavily indebted economies to increased interest rates, highlighted by Mervyn King, governor of the Bank of England this week, is a worry – most obviously so in relation to those mortgage markets where much borrowing is at floating rates.
In countries such as the UK, that vulnerability seems likely to restrain economic growth for many years during which the rate of mortgage defaults will probably increase from current low levels. Yet a shift to a higher interest-rate environment will also pose a micro-level challenge to the business sector on which debt-encumbered economies are relying to offset weakness in the household sector.
John Grout, policy and technical director of the Association of Corporate Treasurers, points out that the people carrying out the treasurer’s role in companies of all sizes today have grown into their jobs over 30 years of declining real interest rates. They will have to adopt a new mindset to find ways of building robustness into capital structures to cope with a more inflationary environment characterised by higher real interest rates, adverse demographics and declining rates of saving in the larger Asian economies.