Britain’s caught between a mortgage shock and a rising prices hard place
ONLY when you think it’s safe to get back into the mortgage market, a shock comes in like a wave.
The bond market is in turmoil, UK borrowing costs soar and lenders raise interest rates, with a rise of as much as 0.45 percentage points from Nationwide, the country’s largest construction association.
So what’s happening? And whose fault is it this time?
Last fall’s small budget horror show during Liz Truss’ disastrous tenure as prime minister spooked investors about the UK’s stability.
This led to government bonds becoming riskier and borrowing costs to skyrocket, driving up mortgage rates and the so-called “stupid premium.”
A bit of political stability – achieved thanks to the much more stable management of Chancellor Rishi Sunak and Prime Minister Jeremy Hunt – led the market to believe interest rates have peaked, helping to stabilize Government borrowing costs.
Indeed, the markets – which had predicted a 6% yield under Truss – have revised their top forecast down to a much less painful 4.25%.
And homeowners feel confident enough to bet with a follow-up mortgage in the hope that monthly payments will drop again soon.
This week, however, that optimism was washed away by disappointing inflation numbers.
Well, overall inflation has started to fall, from 10.1% to 8.7%.
But this is still much higher than the 8.2% that economists had predicted.
And the missed target was made even worse by figures showing that core inflation – which excludes more volatile food and energy prices – is still rising to 6.8%.
“Inflation is slowing but people’s lives are still getting worse, just a little bit slower than before,” said Michael Hewson, market analyst at CMC Markets. And he added, “It’s a bit like Chinese water torture.”
What’s different this time, compared to last fall, is exactly who and what worries the market.
Under Truss, it was the Prime Minister and Prime Minister who spooked investors by implementing non-refundable tax cuts while spending lavishly on the energy support package.
This time it was the Bank of England and its hapless Governor Andrew Bailey.
In short, investors are still not convinced by the Bank’s plan to completely control inflation.
The next Bank of England meeting on June 22 is not an event.
But now it is expected to set up another rally, at least from 4.5% to 4.75%.
Mr Bailey – while acknowledging the Bank has much to learn from the recent turmoil – dismissed criticism that he was too slow to respond to inflation that was eating away at cash. people. But many people disagree.
In November 2021, as the world faces post-Covid shortages and supply problems, inflation is at 6%.
The bank, mistaking it for a push, was overly cautious in using its biggest weapon – raising interest rates – to tackle inflation.
Its first move was to inched them higher by just 0.15 percent, compared with the US Federal Reserve which hit a punch with an immediate 0.75 percent gain.
“The bank used a knife to gunfight, and if you don’t rush in forcefully and quickly, you prolong the pain,” Hewson said.
Now, despite a series of repeated late rate hikes, inflation remains “sticky” and there is a lack of confidence in when it will ease.
Signals from the Bank remained mixed, with mortgage holders paying the price as Government yields rose afterward. Yields – the amount of interest they pay – increase as they are perceived as riskier because investors want the greater rewards of owning them.
These bonds – called backend bonds – are important to the economy because banks use them to calculate the cost of borrowing for households and businesses.
Due to last week’s chaos, the 10-year government bond yield rose from 3.7% to 4.3%. By comparison, that bond was at 4.6% during the Small Budget market crash last October.
As Simon French, economist at Panmure Gordon, puts it: “Disturbingly, the UK ten-year government bond yields are currently the highest in the G7. This didn’t even happen in the Small Budget at the end of 2022.”
All of these have a real impact on the cost of our home loans.
With interest rates now expected to be pushed to 5%, a homeowner who has fixed a £200,000 mortgage over two years in 2021 now faces an increased monthly payment of £561 a month.
Touch and go
A household with a £100,000 mortgage needs to find £264 more a month than they paid two years ago.
While people wonder how to balance the books, the government is worried about how inflation will play out after Rishi Sunak promised to halve it by the end of the year. Jeremy Hunt yesterday even said he would accept pushing the country into a recession with higher interest rates if it meant tackling rising inflation.
At the time of the Prime Minister’s pledge, inflation was at 10.7% and was considered an easy target to score. But with food prices still at 45-year highs and the Bank’s bazooka rates proving ineffective, it now looks like touch and go.
Economists warn that another rate hike will lead to further consumer pain and could even push us into a recession. The question is how much damage does the Bank want to do to the economy before it recovers?
What’s better, a short pain and recovery or a long way past the honeycomb?
Unfortunately, the 1.4 million households with mortgages this year will be affected in any way.