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Why the UK economy is one of the most vulnerable right now


George Clerk | E+ | Getty Images

There’s an economic idiosyncrasy in the U.K. that makes it “one of the most vulnerable countries in the world right now,” according to an investment strategist.

Mike Harris, the founder of Cribstone Strategic Macro, argues that a major problem for Britain is that its mortgage market is “heavily short-term.” While in the U.S. and in other parts of Europe citizens like long-tenure mortgages, many Brits opt for short-term loans of less than five years. Tracker mortgages are also popular which fluctuate with the Bank of England’s base rate.

Harris told CNBC Friday that this was an issue as rate rises would immediately trigger losses to household incomes, while it might not actually deal with the issue of inflation. He explained that the U.K. was a country that “imports inflation,” so the effect of interest rate hikes by the Bank of England wasn’t simply a rebalancing of supply and demand that would slowly rein in consumer price growth.

“Here we’re actually not really dealing with a pure situation where we’re trying to slow the economy, we are ultimately trying to rebalance expectations, and the U.K. is a country that imports inflation … So we’re not effectively in a position where we’re free effectively to just focus on supply and demand,” he said.

He added: “We get stuck in a situation where global inflation is driving our inflation at this stage, we have to hit the consumer and instead of just reducing the propensity to spend in the future, we’re actually taking further money out of household income, which doesn’t happen in the U.S.”

The Bank of England raised interest rates by a quarter of a percentage point on Thursday, taking its base interest rate up to 1%. That’s the highest interest rates have been since 2009 and was the BOE’s fourth hike in a row. The central bank also forecast that inflation would hit 10% this year, with soaring food and energy prices exacerbated by Russia’s unprovoked attack on Ukraine.

Harris said he had twice requested data from the Bank of England about how much lending in the country was fixed on a two-year term and how much was set for five years, but said that he was told that the central bank did not keep that information.

Harris argued that it was “absolutely insane for a central bank to not appreciate the economic impact associated with every rate hike.” He explained that consumer behavior would unlikely change a lot in five years but it would over two years.

U.K. ‘facing the music’

According to a data from trade association UK Finance, 1.5 million fixed-rate mortgage deals are due to expire in 2022, with another 1.5 million due to do so next year.

In data released on Friday, investment platform Hargreaves Lansdown calculated that someone remortgaging at the end of a two-year fixed term deal, following the latest interest rate hike, could see their monthly payment go up by £61. If the base rate hit 1.5%, Hargreaves Lansdown worked out that could add £134 to their monthly mortgage…



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Why the UK economy is one of the most vulnerable right now

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