By James Glynn

 

SYDNEY--As central banks raise interest rates to combat the biggest inflation spike in decades, Fitch Ratings says Australia, Spain and the U.K. are the most exposed to a financial shock.

Australia and Spain's vulnerability stems from a high proportion of variable-rate mortgage lending, while borrowers in the U.K. already have relatively high debt-to-income ratios.

The share of variable rate residential loans and borrowers' current debt-to-income ratios give an indication of the relative exposure of residential mortgage-backed securities and covered bond markets to rising interest rates, the credit-rating agency said in a report.

Fitch stress tested the average debt-to-income ratio for loans originated in 2020, and assumed the rates payable on variable-rate loans increased by three percentage points above their original rate by end-2023, while keeping income unchanged.

"Considering both variable and fixed-rate loans, borrowers in Australia, Spain and the U.K. would experience the most significant payment shocks in our scenario, measured by the relative increase in the stressed versus original debt-to-income," Fitch said.

Variable-rate loans in Australia, Spain and the U.K. represent a significant portion of new loan originations, and their starting debt-to-income ratio ranges between 26% in Australia and 34% in the U.K. Those countries appear the most sensitive to a rise in rates as the ratios would move to 34%-39%, Fitch said.

In March, Fitch forecast seven interest rate rises from the U.S. Federal Reserve and four from the Bank of England in total in 2022, with policy rates reaching 3.0% in the U.S. and 1.75% in the UK at the end of 2023. Similar trends were forecast for Australia and Canada, where it forecast policy rates to increase to 1.25% and 2.0%, respectively, by the end of 2023.

However, higher-than-expected inflation and more hawkish commentary from central bankers since March point to strong upside risks to these interest-rate projections, and financial markets are pricing in even faster tightening, Fitch said.

 

Write to James Glynn at james.glynn@wsj.com

 

(END) Dow Jones Newswires

May 17, 2022 20:49 ET (00:49 GMT)

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