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High mortgage rates will tip Britain into recession this year as homeowners coming to the end of fixed rate deals are hit by soaring costs, a leading ratings agency has warned.
The UK, the US and Germany will suffer technical recessions but the UK will be the only advanced economy to record negative growth across 2023, according to Moody’s.
It came as a Bank of England policymaker said underlying inflation was proving much more persistent in the UK compared with other countries, making the task of bringing price rises back under control “much more challenging”.
Catherine Mann, who is one of the Bank’s most hawkish rate-setters, also warned that the adjustment to sustainably higher interest rates will inevitably result in “things breaking”.
Ms Mann also defended her voting record on the Monetary Policy Committee (MPC). Threadneedle Street has come under fierce criticism for failing to get inflation under control.
Describing her critics as being in the “peanut gallery”, Ms Mann said she had consistently voted for higher rates compared with the rest of the MPC. “All of last year, I voted above the majority, so don’t blame me,” she told a panel in Zurich.
Ms Mann said the transition to higher rates would have “an awful lot of volatility associated with it. Volatility in exchange rates, and volatility in prices. And some of that volatility is going to be reflected in things breaking.”
Britain is particularly vulnerable to a recession because so many homeowners have short-term fixed-rate mortgages.
“The UK’s relatively short-dated mortgage market means that around half of outstanding mortgages have a floating rate or will need to be refinanced at higher rates this year, which will reduce household disposable income,” Moody’s warned. The blow for a typical household will be equivalent to a 7.5pc drop in disposable income, according to the Institute for Fiscal Studies.
While British mortgage holders typically secure their interest rates for two or five years, those in America and Germany typically lock in rates for 30 years and 10 years respectively, meaning most homeowners will be completely unaffected by recent rate rises.
UK GDP will shrink by 0.1pc across this year, Moody’s forecast. The only countries in the G20 that will see bigger falls are Russia and Argentina.
Separate data showed home sales slumped to their lowest level since moves were banned during the pandemic.
There were 67,220 residential transactions in April, according to HM Revenue and Customs. This was a drop of 29pc compared to March.
April marked the lowest monthly sales total since the 2020 lockdown period when viewings were banned and the market was essentially frozen.
The current slump reflects the sharp increase in mortgage rates since September’s mini-Budget. The average two-year fixed-rate deal climbed from 4.7pc to 6.65pc in just four weeks after the statement.
Because the average property deal takes around five months from sale agreed to completion, this spike is now hitting the spring transaction data.
The European Central Bank also warned higher interest rates were “testing the resilience” of eurozone households and companies and raising the risk of “disorder” across markets.
In its financial stability review published on Wednesday, the ECB admitted its fight against inflation had revealed weaknesses in the financial system that are becoming harder to ignore.
The ECB has hiked its key interest rates by an unprecedented 3.75 percentage points since last July in an attempt to bring down rapidly rising prices across the bloc.
While the central bank said conditions had improved slightly and energy prices had fallen, it added that higher borrowing costs and stricter credit conditions were “testing the resilience of euro area firms, households and sovereigns”.
The current “correction” in real estate markets could turn disorderly if higher mortgage rates increasingly reduced demand”, it said.
Fears of higher US interest rates, uncertainty over a deal to raise America’s debt limit and poor Chinese data pushed stock markets lower on Wednesday. The FTSE 100 index fell 1pc to a two month low of 7446.
Britain’s blue chip index has fallen more than 5pc this month, its worst May performance since 2015. Separate US data showing the number of US vacancies topped 10 million for the first time prompted investors to raise their bets on a 0.25 percentage point rate hike at the Federal Reserve’s next meeting in June.
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