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MNI (London)
By David Robinson
     LONDON (MNI) - UK household balance sheets deteriorated and households'
expectations of their financial position over the next 12 months turned, on
balance, negative, a survey for the Bank of England found.
     The NMG Consulting Survey for the BOE, published Friday, found that the
perception that Brexit will harm the UK economy has became widespread while
household finances were squeezed by the rise in inflation and pessimism
increased.
     NMG's survey for the second half of 2017, with responses collected in
September, found that for the first time in three years the net balance of
households expecting their financial position to improve over the coming 12
months was negative, with the balance falling from barely positive to close to
-4%.
     Close to a net 30% expected the general economic situation to deteriorate
over the next 12 months with nearer a net 40% anticipating the Brexit process
would have a negative effect.
     Incongruously, households on balance expected the Brexit effect to push up
their spending. BOE economists pointed out that this was probably because
households, hit by higher inflation, expected their nominal, non-discretionary,
spending to rise.
     The expected increase in spending is "likely to represent a nominal effect,
rather than an increase in spending once adjusted for the rise in price
inflation. This is also supported by both a rise in household inflation
expectations in the latest survey and a pickup in expectations of nominal income
growth since the 2016 H2 survey," a report on the NMG survey in the BOE
Quarterly Bulletin stated.
     The survey was carried out before the November Bank Rate hike but it took a
detailed look at borrowers funding and debt levels, and spelled out why the
impact of the 25 basis point hike would be cushioned.
     Most mortgagors are on fixed rate mortgages and they will only see the
impact of the hike on their debt payments once their fixed rate deal comes to an
end.
     In all, NMG found 38% of respondents with a mortgage were on a floating
rate contract, with a further 5% on a fixed-rate contract expiring in 2018.
Typically, UK fixed rate mortgages, however, are only short-term, running for
two or three years, so 62% of mortgagors were expected to be impacted by the
rate hike by the start of 2019.
     Some of these households, who took out fixed rate mortgages when the yield
curve was higher, could actually see repayments decrease.
     The proportion of households with high debt-to-income ratios, however,
while having risen recently is still markedly below pre-global financial crisis
norms.
     "Following a 25 basis point increase in their mortgage rate, only 2.5% of
mortgagors would need to take action to find the extra money, rising to 7.5% for
a 50 basis point rise," the survey found.
     The implication is that household indebtedness is not going to be a major
hurdle to future monetary policy tightening.
     The survey, overall, however meshes with the BOE Monetary Policy
Committee's view that growth in discretionary consumer spending is likely to be
subdued.
--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com
[TOPICS: M$B$$$,M$E$$$,M$$BE$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com