Tuesday 29 June 2021 7:32 pm | Updated: Friday 17 September 2021 11:32 am

UK’s debt risks soaring by over £100bn due to post-pandemic inflation

Investors favour holding the dollar at times of economic stress, putting pressure on the pound during the coronavirus pandemic

The Bank for International Settlements (BIS) today published its annual report today, suggesting that the UK’s post-pandemic debt could rise by over £100bn due to inflation.

In its report, the Swiss-based bank set out its outlook for global recovery from the Covid pandemic. Its primary scenario was one of solid recovery but at uneven rates, a “daunting” challenge for policymakers in its own right.

Alternative scenarios

It also presented two alternative scenarios. First, government stimulus and households spending their lockdown savings could lead to more growth, but bring with it high levels of inflation and a “substantial tightening in global financial conditions”. Secondly, new Covid restrictions could dampen growth.

In this first scenario, interest rates could rise to around 6 per cent, as in the mid-1990s. This would send the UK’s current debt servicing costs, currently at £45bn, spiralling to upward of £100bn.

While BIS head Agustin Carstens said the BIS considers that recent increases in inflation “will most likely be temporary”, policymakers need to be prepared for situations where the trend continues. “You don’t want to be surprised,” he added.

The BIS said even “a temporary rise in inflation could deliver a sizeable financial tightening”.

Wider findings

The BIS, dubbed the the central bank to world’s central banks, said uneven recovery could leave emerging market countries more vulnerable to future difficulties. It predicted periods of “noisiness” for financial markets, citing volatility in bond and equity prices earlier this year due to fears of stimulus tapering off.

With public debt at post-war peaks, it said normalising fiscal and monetary policies will not be easy.

The bank also criticised cryptocurrencies such as bitcoin in the report, labelling them as “speculative assets rather than money”. However, it backed the idea of central bank digital currencies.

It also raised concerns over the current surge in global house prices as a driver of inequality, particularly between the old and the young.

Inequality, especially in lower-paid workers, had also been spurred by the Covid pandemic and the leap in stock markets driven by huge amounts of stimulus, the BIS said.