LONDON, June 23 (Reuters) - If one reason the Bank of England has failed to gain traction on exceptionally high UK inflation is too many fixed-rate mortgages, it may face the same problem when it needs to hit reverse in a recession.

The BoE threw what one investors described as a "rate grenade" into the British economy on Thursday, lifting rates by half a percentage point to 5% - its 13th hike in row to tackle a still-rising 'core' inflation rate at its highest since 1991.

Jamming up peak rate pricing to more than 6% following the move, markets have also re-upped recession forecasts - largely due to hit to outsize hit to the country's 9 million home mortgage borrowers.

With some 1.6 million of those due to re-fix mostly 2-5 year fixed rate deals over the next 18 months - half of those by the end of this year - this super-hike will burn. Two-year fixed mortgage rates have doubled to 6% in just 10 months and were less than 1% two years ago.

Amplifying what that means for the economy, the National Institute of Economic and Social Research think tank estimates these higher repayments will mean 1.2 million households will run out of savings this year - taking the total share deemed insolvent to 28%, or almost 8 million.

But the BoE has little choice other than to act tough given core inflation, excluding highly distorted and volatile energy and food prices, is still climbing higher 18 months after it started 5.9 percentage point credit squeeze.

Why hasn't the medicine worked so far? Reasons and theories abound: pent-up pandemic savings buoying demand, tight labour markets lifting wages, corporate margin padding and price gouging, and Brexit-related supply chain hits.

But one aspect of this UK rate rise cycle that differs from prior ones over the past 40 years is the share of mortgages on fixed rates has risen to more than 85% from 30% 20 years ago - albeit mostly 2-5 year tenures compared to the 25-30 year deals commonplace in the United States or Germany.

Fixed-rate deals were only introduced at all in 1989 and the vast majority were floating rates until just eight years ago.

In short, it takes much longer now for BoE interest rate changes to hit mortgage holders than it used to do - and that's been a critical conduit for UK monetary policy in the past as two-thirds of homes are owner occupied and almost a third of those financed with mortgages.

TRANSMISSION MUTATION

This has potentially huge implications, what Barclays strategist Moyeen Islam calls a "mutation in the transmission mechanism".

"At what point does 500 basis points of tightening really begin to hit people and affect households? It's glacial," he said. "The immediate effect of the transmission mechanism in the UK has gone and maybe it doesn't come back."

So while the timing of the lagged hit from a year of rate rises may be harder to gauge, it will hit eventually like a ton of bricks - as NIESR point out - because fixed rate maturities available remain comparatively short internationally.

Assuming a household demand shock and recession does indeed now follow a more aggressive monetary policy stance and inflation falls back toward target as widely forecast late next year, then the BoE may reverse rather quickly as unemployment and business failures then rise sharply.

But the transmission mechanism of that rate easing may be just as weak and variable as it's proving to be as the BoE tightens - and for the same reason.

M&G's fixed income chief investment officer Jim Leaviss points out that the housing market hit could see the Bank cutting rates again as soon as next year.

But he added: "The bad news for the Bank and the Government though will be that many mortgage holders will have fixed at the peak of the rate cycle – and won’t therefore benefit from cuts to the full extent."

If BoE easing fails to lift the economy the same way as it did in the past, then it may - just like now - have to be more aggressive to affect aggregate demand.

Is quick return to near zero interest rates then on the cards over the horizon?

Certainly the growth side of the equation could well point in that direction.

Vivek Paul, UK Chief Investment Strategist at BlackRock Investment Institute thinks guessing over a technical recession is "secondary to the bigger picture".

Cumulative growth, combining the BoE's own estimates with realised data, is set to be less than 3% over the four years to 2026, Paul estimated, adding it's only been as bleak on two other occasions over the last 35 years.

Puncturing the economy may now be inevitable, but markets are still unsure about getting inflation back to target and this may be the nightmare scenario.

As Leaviss points out, five-year inflation expectations in the bond market are still stubbornly one percentage point above the 2% goal.

In the end, the BoE has few good choices - but the days of fine tuning the economy with nudges and tweaks may be over.

The opinions expressed here are those of the author, a columnist for Reuters

(by Mike Dolan, Twitter: @reutersMikeD. Additional reporting by Naomi Rovnick; Editing by Conor Humphries)