In an interview with The Daily Telegraph, Paul Fisher, the executive director of markets and a member of the rate-setting Monetary Policy Committee (MPC), said central bank policymakers would like rates to increase as much as tenfold from their current historic low of 0.5pc as soon as possible.
No, this doesn\’t mean that mortgage rates are about to rise tenfold.
According to separate Bank data, variable rate homeowners are paying interest of 3.28pc on average compared with 4.34pc for those on fixed rates…
It means they might triple though.
Banks don\’t make their money off the total interest paid. They make their money off the difference (minus credit losses of course) between what they borrow at and what they lend at. The margin.
So, if base is 0.5% and floating rates are 3.28, then base rates rise to 5%, we might expect mortgage rates to move to 8.78 %.
This isn\’t an exact calculation, I am not a financial adviser, take this at your own risk etc.
But as an illustration it\’s good enough. Me, I\’m going to be doing a little more freelance work I think (I am indeed one of those lucky people who can pick up extra work as and when desired) to pay down the mortgage a little faster I think.
Or maybe just 7.78%, assuming a constant margin…
and in doing so utterly destroy disposable income for a large proprtion of the population. The depnedence on variable rate mortgages is the achilles heel of the UK economy. Sadly the monetary authorities consistently fail to consider the cash flow effects of monetary policy relying instead on econometric models of the past. In effect this would be like raising income tax to 90p in the pound. Inflation in the UK is not because we are all having an overheated, leveraged good time, it is almost entirely in areas where governmnet sets prices (no competition) so is already acting as a deflationary force. A policy of having depression in the competitive economy to control a variable that is largely set in the planned economy is the sort of madness I thought we had got rid of with the last lot.
CPIY, which excludes the impact of indirect taxes (like the air passenger duty that came in in November for example) is running at around 1.6%
I have grown cynical of the BoE. There is only so many times you can claim inflation is ‘unexpectedly’ above target and do nothing about it before it begins to look like you are perpetuating a low interest rate and (relatively) high inflation policy.
If inflation keeps surprising Merv & Co. what use are they?
before it begins to look like you are perpetuating a low interest rate and (relatively) high inflation policy.
Well, yes. The alternative to monetary expansion, given the necessity for fiscal deflation (whether through cuts or tax rises – that’s irrelevant) is even more horrific economic pain and suffering than the UK’s currently getting. The fact that the UK’s debts are pound-denominated, so inflation will also reduce them, is an added bonus.
(just to be clear: I’ve no debt and reasonable savings in the UK; my expenses are in AU$ and I get paid mostly in GBP by companies that sell mostly in US$. So a massive UK monetary clampdown, prioritising the interests of whining wealthy savers over everyone else and plunging the country into an Irish-style depression, would do me no harm at all. That still doesn’t stop me from thinking it’s a terrible idea).