Households across the West will not their debt interest burden ease until 2025 “at the earliest” — with the UK’s burden set for “a sharp rise,” according to Fitch Ratings.
Rising policy rates have pushed up the cost of borrowing in the past couple of years, but there are cross-country differences, primarily reflecting differences in mortgage markets, says the ratings agency.
It says countries where long-term fixed-rate loans dominate, such as in the US, Germany and France, households have been fairly sheltered from rising interest rates.
But director at Fitch Ratings Jessica Hinds says: “By contrast, in countries that have a greater share of variable-rate loans, such as Australia or Spain, or shorter fixes, such as the UK and Canada, the effective interest rate has risen more sharply, pushing up households’ interest service burden.”
It forecasts that central bankers are likely to start cutting rates “later in 2024”.
UK markets currently expect the Bank of England to begin cutting rates in August or September.
The agency says households interest service burdens are close to their peaks in some developed markets, such as Australia, Italy and Spain.
However, Hinds adds: “The UK looks vulnerable as a large number of short-term fixed-rate mortgages reset in 2024 onto significantly higher rates. “
“We see the UK household sector interest burden rising to 6.5% of income by the end of this year from 4.0% at the end of 2023.”
The agency does not expect a return to very low interest rates. This means that indebted households will pay more in interest as a share of income than in the past.
Hinds points out: “While this should be manageable, the rising cost of debt servicing has been an impediment to consumer spending and one which is likely to remain well after policymakers start loosening.”
