Rate cut unlikely to alleviate Britons' borrowing needs

A cut in Bank of England interest rates is unlikely to reduce the average household debt, according to a leading City analyst.

ABN Amro believes that rates would have to be lowered from 4.75 per cent to 2.5 per cent before they would have any meaningful effect on current debt levels in the UK, as the public are struggling to manage the principal loan rather than the interest on repayments.

In particular, the growing 'buy now, pay later' trend and low interest rates have encouraged more households in to debt.

"Households have suffered from money illusion," said ABN economist James Carrick, speaking to the Evening Standard.

"Though interest payments remain affordable, households are struggling to repay the debt principal in a low inflation world."

The Bank of England recently revealed that debt including mortgages held by households stood at £1.1 trillion in April ? a record level and any downturn in the economy could see an increase in the number of people defaulting.