Moody’s cautioned on Thursday that UK consumers are vulnerable to higher interest rates. The warning comes two weeks ahead of the central bank’s next meeting, during which they are expected to raise rates. The rate hike would be the first in nearly ten years.
Moody’s also noted that British household debt levels are high and continue to rise. The regulator expects to weaken in securitisation deals that are linked to the consumer economy. Residential mortgage-backed securities are also sensitive to a weaker economy, and Moody’s expects rent and occupancy rates to decline.
The outlook for the prime RMBS sector is better, as borrowers were in better financial positions.
The comments from the rating agency come after the Financial Conduct Authority regulator reported that four million Britons were having trouble paying their bills. Renters and young consumers struggle the most to make ends meet each month.
Only 1% of those over 65 describe themselves as being “in difficulty,” while 13% of 25- to 34-year-olds say they’re in difficulty. About 83% of those over 65 have no debt and have an average of £45,000 in cash savings. Among those between 25 and 34, 19% have no savings and 30% have less than £1,000 in cash savings.
Roughly 6.5 million people in the UK have no savings, and 12.9 million have been forced to tap into their overdraft in the last 12 months. Among these 12.9 million people, 3.1 million have been hit with penalties for exceeding their limit and overdrawing without permission from the bank.
Those who are most vulnerable are more likely to take out a doorstep loan, the FCA said. In the last 12 months, 3.1 million people have taken out these loans, which sometimes come with an interest rate of 1,600%. These loans can make it more difficult for borrowers to get a mortgage later on down the road.
The Financial Conduct Authority’s survey also found some idiosyncrasies. Those who chose not to go to university, for example, were much happier than those who did.
One in six people is unable to manage a £50 increase in their monthly bills. The Financial Conduct Authority’s survey found that 4.1 million people are facing severe financial difficulty in the UK.
Total unsecured debt has now surpassed £200 billion in the UK. High personal debt levels make financial institutions more vulnerable to economic shocks. Data on public sector net borrowing is due tomorrow, with a projection of 5.7B.
A large percentage of economists have raised concerns about raising rates, citing a lack of evidence of wage or economic growth ahead of Brexit.
Consumer credit continues to outpace household income by a significant margin, according to Reuters.
The Governor of the Bank of England has warned that a rate hike may leave many families struggling to cope. The Children’s Society says that children living in families with debt are more likely to suffer mental health problems later in life. Parents are also forced to cut back on necessities, like heating, clothing and food when debt payments become a priority.
While inflation has topped the target set by the Bank of England, wage growth has been slow to catch up.