Fitch says Spain, Australia and the UK are experiencing financial shocks due to rate hikes

by James Clin

SYDNEY – A Fitch forecast says Australia, Spain and the UK are all experiencing financial shocks as central banks have raised interest rates in response to the highest inflation in decades.

The impact in Australia and Spain stems from higher rates on convertible mortgages, while borrowers in the UK already have relatively high debt-to-income ratios.

The variable-rate equity share of mortgages and current borrowers’ debt-to-income ratios suggest that mortgage-backed bond and closed-equity markets are exposed to rising interest rates, the credit rating agency said in a statement.

Fitch pressure tests the average debt-to-earnings ratio for loans formed in 2020, and by the end of 2023, the interest payable on variable-rate loans has increased three percentage points from the original ratio, while yields remain unchanged. without change.

“Considering dynamic lending and fixed interest rates, borrowers in Australia, Spain and the UK will experience the most significant rate shocks in our situation, as measured by the relative increase in pressure on senior debt yields,” Fitch said.

Convertible loans in Australia, Spain and the UK account for a significant share of new sources of credit, with debt-to-earnings ratios being 26% in Australia and 34% in the UK. Fitch said the rate would be 34% to 39%.

In March, Fitch predicted that interest rates would rise to seven in the US Federal Reserve in 2022 and to four at the Bank of England in 2022. The policy rate would be 3.0% in the US and 1.75% in the UK by the end of 2023. similar trend. The forecast for Australia and Canada is for policy rates to rise to 1.25% and 2.0% by the end of 2023, respectively.

However, higher-than-expected inflation and worse-than-expected comments from central bankers since March suggest a strong reversal risk to this rate forecast, and Fitch said financial markets were tightening.

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