Rate rises spark 'massive volatility' warnings

Markets will go higher despite volatility: Pro
Markets will go higher despite volatility: Pro

Vastly divergent policies from global central banks have sparked investor concern that 2015 is set to be a turbulent year, as the Bank of England (BoE) details the dangers that an interest rate rise poses for the nation's housing market.

"Next year is going to be massively volatile because you've got all the major central banks doing things they don't really know how to do," Peter Sullivan, head of European equities at HSBC, told CNBC Monday.

The U.S. Federal Reserve and the BoE are on course to raise their main interest rates from record lows either next year or at the beginning of 2016. This is in contrast to the euro zone and Japan, where key interest rates are likely to remain low for the next few years.

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Interest rates – which are benchmarks for all sorts of mortgages and loans - were cut after the global financial crash of 2008 in the hope of stimulating lending. However, with both the U.K. and U.S. economies seeing better growth and falls in unemployment levels, expectations are high that there will be a change in policy in the near future.

'Disorderly normalization'

Ratings agency Moody's warned of "disorderly normalization" in its 2015 outlook, adding that rate rises could hit growth and undermine sovereign credit quality.

There could be an immediate shock to asset prices and capital flows, Moody's said, stemming from a drop in confidence in the likely evolution of U.S. rates.

Credit Suisse analysts also expect major shifts in capital flows and asset pricing next year, warning of a volatility "awakening". The bank said it was expecting more market storms in 2015 than of late, and predicted a year-end target of 2,100 points for the , which is below its mid-year target of 2,200.

Meanwhile, HSBC's Sullivan urged investors to buy high-yielding stocks to ride out this period of turbulence, adding that investing in telecoms, utilities, and insurance stocks would be the best way to navigate 2015.

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The Federal Reserve building in Washington.
Gary Cameron | Reuters

Overleveraged families

It's not only investors and analysts that are concerned about rate rises in 2015, with the impact likely to be felt by homeowners who have borrowed from banks.

The Bank of England published research into the impact of a rate rise on the nation's housing market on Monday.

In its latest quarterly bulletin, the central bank singled out a highly-leveraged part of the U.K. economy: those with debt repayments outnumbering gross income by a ratio of 40 percent.

Currently, only 4 percent of the country's mortgage holders are in this position, it said, but warned this figure would rise to 6 percent if there was a two-percentage-point rise in mortgage interest rates (even assuming a 10 percent increase in income).

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"The number of U.K. households in this vulnerable category would increase from around 360,000 to 480,000," the BoE said in its report, adding that it would be more severe if incomes didn't rise as much.

"Higher interest rates will increase financial pressure on households with high levels of debt," it said. "On average, younger households, who are more likely to be borrowers, will be worse off, while older households, who are more likely to be savers, will gain."

In the early 1990s, U.K. house prices fell significantly following a housing boom in the late 1980s. Some analysts are now warning of a similar trend, given hefty price gains in the last two years and accommodative government policies.

However, the BoE found that the number of overleveraged families was likely to remain below the average seen in the early 1990s.