The Bank of Spain warns of the impact of the rate hike

Households with low and medium incomes are going to have greater problems paying their mortgages when the financial institutions begin to apply the rise in interest rates.

Thomas Osborne
Thomas Osborne
11 November 2022 Friday 22:44
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The Bank of Spain warns of the impact of the rate hike

Households with low and medium incomes are going to have greater problems paying their mortgages when the financial institutions begin to apply the rise in interest rates. This is one of the main conclusions of the Autumn Financial Stability Report presented yesterday by the Bank of Spain. In the document, the supervisor estimates that in the coming months there will be more vulnerable families and that those that are already vulnerable will be in worse conditions.

The body led by Pablo Hernández de Cos calculates that a rise in interest rates of 300 basis points will cause an increase in spending for families of around 4%, which, added to inflation, will lead to a bill of more than 13 .8%.

The Bank of Spain considers a vulnerable household to be one in which the net financial burden represents more than 40% of disposable income. That is, those families that have to spend 4 out of every 10 euros of their income to pay off debts, including mortgages and other loans. More than 35% of the most disadvantaged families are already in this situation. And rising, since the supervisor anticipates that this percentage will increase as banks transfer the increase in official rates to the price of credit. It must be remembered that three out of four mortgages in progress in Spain are still at a variable rate.

To solve this problem, the Bank of Spain proposes support measures to deal with the payment of loans "focused" on the most vulnerable and "temporary". All this so that problems are not generated in the medium term for new clients.

The Bank of Spain report also points out that the risks to financial stability “have increased in recent months”. To persistent inflation must be added "the probability of a contraction in activity," he warns. The supervisor does not foresee a recession at this time, but it does highlight that the probability of it occurring today is greater than it was six months ago.

Another of the vulnerabilities highlighted by the Bank of Spain is the “high public debt”. In this sense, the report appreciates that the reduction of the debt that the Government is carrying out is positive news, but that if additional measures are not taken "these gains will tend to be exhausted".

The supervisor also notes in its autumn report that the situation of the banks in terms of profitability has improved significantly in recent months. In this way, credit has remained stable in the first half of 2022, although it is true that consumer credit is falling. That of companies rebounded thanks to the decisions of the large companies to substitute the financing of the markets for that of the banks.

Doubtful loans, moreover, have been falling in recent months and now stand at 12.4% year-on-year. This is because the banks have been shedding their impaired portfolios. There has also been a drop in loans under special surveillance, which stand at 9.5%. Despite this, risks to bank balance sheets remain.