British consumers are vulnerable to a hike in interest rates, ratings agency Moody’s has said, two weeks before the Bank of England is widely expected to hike borrowing costs for the first time in more than a decade.
British household debt levels are high and still growing, Moody’s noted in a report on the outlook for securities tied to the consumer economy.
The ratings agency’s comments came a day after Britain’s Financial Conduct Authority regulator said over four million Britons were having difficulty paying their monthly bills, especially younger consumers and renters.
“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,” said Annabel Schaafsma, managing director of structured finance for Europe, the Middle East and Africa at Moody’s.
Consumer credit which until recently was expanding at an annual rate of 10% is still outpacing household income in the UK by a wide margin. Sterling skidded against the dollar yesterday after data showed British retail sales slowed unexpectedly sharply in September, dragging quarterly growth to its weakest annual rate since 2013 and suggesting consumer demand remains uncertain ahead of the expected rate rises.
Retail sales volumes fell 0.8% in September, the UK’s Office for National Statistics said, reversing a jump in August. Third-quarter growth slowed to its lowest year-on-year rate since the second quarter of 2013 at 1.5%. “Uncomfortable questions have been raised about just where UK growth is going to emerge from in the fourth quarter,” said Jeremy Cook, chief economist at foreign exchange services company WorldFirst.
“We will find out in the coming months whether this is consumers holding off on purchases in preparation for Christmas, or whether the Bank of England’s messaging on interest rate rises has been enough to keep some hands in pockets,” he said,
The Office for National Statistics said yesterday’s figures pointed to retail sales adding 0.03 percentage points to UK economic growth in the third quarter, compared with 0.09 percentage points in the second quarter. The rising cost of goods in shops which are now increasing at their fastest since March 2012 meant the amount British shoppers were getting for their money was growing more slowly than the amount they spent.