Central banks may be on track to start cutting interest rates later this year, but it will take time for rate relief to filter down to financially stressed households, says Fitch Ratings.
In a report Thursday, the rating agency said even as monetary policy eases, indebted households won’t see their debt service burdens improve until next year.
“In some countries, the interest service burden is set to climb through 2025, with a sharp rise still to come in the U.K.,” the agency said in a release.
The U.K. looks particularly vulnerable, the report said, as a large number of mortgages are due to reset to much higher rates in 2024.
“We see the U.K. household sector interest burden rising to 6.5% of income by the end of this year from 4.0% at the end of 2023,” said Jessica Hinds, director at Fitch Ratings, in the release.
The impact of higher rates has varied across markets, largely due to differences in the composition of local mortgage markets, the report noted.
In countries with a higher share of variable rate mortgages, and countries with shorter loan terms, such as Canada and the U.K., “the effective interest rate has risen more sharply, pushing up households’ interest service burden,” Fitch said.
In markets with more long-term, fixed-rate loans, such as the U.S., Germany and France, households have been fairly sheltered from rising interest rates, the report noted. In these markets, the adjustment to higher rates has barely started, it added.
Moreover, as rates come down, Fitch does not expect a return to the very low interest rate environment that prevailed in recent years.
“Accordingly, indebted households will pay more in interest as a share of income than in the past,” the agency said. “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.”