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Creditfix LB 03-2017

Moody’s Warns on Interest Rate Rise Effect

Ratings agency Moody’s have warned that UK consumers are vulnerable to a rise in interest rates.

The agency noted in a report on the outlook for securities tied to the consumer economy, that British household debt is high and still growing, making consumers vulnerable to any rise in rates.

Annabel Schaafsma, managing director of structured finance for Europe, the Middle East, and Africa at Moody?s, said: ‘As real income declines, UK consumers are vulnerable to an economic downturn and any increases in inflation or interest rates could cause problems for household finances, especially for those on lower incomes.’

The rating agency’s comments come before the next Bank of England meeting, where most economists polled expect the central bank to raise interest rates for the first time in years.

This is despite the majority of economists thinking that now was not the right time to raise rates, citing an absence of evidence that growth in the economy or wages are about to pick up significantly ahead of Britain?s divorce from the EU.

The expected interest rate rise is also despite the Financial Conduct Authority (FCA) recently reporting that four million Britons were having trouble paying their bills. Renters and young consumers struggle the most to make ends meet each month.

The FCA report also found that around 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.

The report from Moody’s stated that the agency expected the performance of securitisation deals linked to the consumer economy to weaken.

It also said that residential mortgage-backed securities (RMBS) based on the buy to let rental market were ‘very sensitive’ to a weaker economy and that both occupancy rates and rent were expected to decline.

However, Moody’s said the outlook for the prime RMBS sector – covering the top end of the residential market – was better because borrowers were in good financial shape.

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