One of the themes of this blog since its inception has been the fear that central banks will keep cutting interest-rates and put us into what has been described as a liquidity trap. That fear came true but it then became entwined with another one which is that when it came time for central banks to plan exit strategies from what they call extraordinary monetary policy they would balk and dither. I expressed that position earlier this week in relation to Sweden which has an economy showing many signs of booming (economic growth 2%+) some of a bubble (house price growing at 8%+ per annum) but interest-rates of -0.25%! You may note that the potential exit point turned into an entry point instead in an inversion of what used to be considered monetary theory along the lines described many years ago. From Federal Reserve Chairman WM Martin in 1955.
The Federal Reserve, as one writer put it, after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just
when the party was really warming up.
You may note that the Riksbank in Sweden has decided instead to offer a second punchbowl for party-goers in its housing market hoping that they will quickly get drunk! Does it not believe its own optimistic forecasts and the official data? I am reminded of the comment on here recently that perhaps recorded GDP (Gross Domestic Product) data these days requires an annual rate of growth of say 2% per annum for us to stand still. I wondered on Wednesday how central banks would respond to the next recession and it would appear I am not alone as this from Twitter by James G Rickards indicates.
We do not know how things will pan out but the recent sequence of disappointing economic data from the United States including yesterday’s 0.2% annualised GDP growth number does send thinking down that road. On it there will be no interest-rate increases and in my opinion we are on a road where central banks think that they are clever by promising them with no intention of delivering them.
Let me pose a question which I have veered near too but not asked so explicitly. If we look back will we think that right now we are still in an economic depression? In spite of the better couple of years for the UK the answer looks like a yes does it not? Places such as Italy, Portugal and especially Greece have been mired in a deep one for some time.
Interest-Rates are falling in the UK
Not a paragraph heading you might expect when the Bank of England has kept the Bank Rate at 0.5% and its Governor Mark Carney regularly trumpets a plan to raise interest-rates albeit at some unspecified date in the future. However this morning has seen this. From the Guardian.
The UK’s cheapest-ever fixed-rate mortgage goes on sale on Friday as a price war continues to drive home loan rates to record lows. The “lowest ever” deal, priced at 1.09% for two years, raises the prospect that home loans allowing people to fix their monthly payments for less than 1% could be just days away.
This adds onto this.
On 20 April, HSBC began offering a five-year fixed-rate home loan with a 1.99% rate – the first time a deal of this type has been available at below 2%.
There is a sort of “gazundering” going on here as it was only just over a week ago that This is Money was telling us this.
Mortgage rates are at record lows and homeowners can fix for two years at just 1.18 per cent and up to ten years at less than 3 per cent.
Back on February the 9th I discussed the falls in mortgage rates which were evident back then.
We certainly have the beginnings of a price war in the fixed rate arena.
Also I pointed out why the falls in fixed-rate mortgages were particularly significant. From the Mortgage Advice Bureau.
Proving to be the minority, just one in ten mortgage applicants opted for the variable rate in December.
Although according to them on Monday variable rates have also taken the plunge.
The war will continue and fixed-rate deals may well stay at their record low rates for the coming months, alongside typical variable rates that have halved over the past twelve months, and five-year fixes that could go below two per cent.
As to the cause of all of this well regular readers will be very familiar with that.
Banks and building societies are also finding that they have surplus money due to the Funding for Lending scheme.
Interesting that market participants think that it is still having an impact after it is supposed to have been wound up. Anyway it has been backed up by the efforts of the European Central Bank offering 60 billion Euros of QE per month pushing mortgage benchmarks there below zero last week for the first time ever. It makes the UK money markets look attractive in yield terms in comparative terms.
The Bank of England agrees
Whilst there is something of a delay in the official data this mornings Bankstats have confirmed that up to the end of March the only way was down.
The effective rate on the stock of outstanding secured loans (mortgages) decreased by 1bp to 3.14% in March and the new secured loan rate fell to 2.68%, a decrease of 10bps on the month.
If we look back we see that mortgage rates have been falling during 2015 so far as they started the year at 3% for new business. Interestingly since they are out of fashion variable rates were 2% at the end of March. But we move on singing along to David Guetta on this subject.
Down Down Down Down
Down Down Down Down
Whilst it is very rarely expressed in this way the credit markets have fractured in the way that they treat different individuals. Whilst there was always a gap between prime and sub-prime credit I note that the record low mortgage from the Co-op for example has a £1499 fee and requires a 40% deposit or equity. Thus it works well for those with a secure financial position and who are borrowing a relatively large sum.
Have we forgotten the past?
Whilst there is increasing inequality in the market there have been mortgage-rate cuts across the board and see if you can spot what might be wrong about these quotes from the Mortgage Advice Bureau.
Buyers on lower incomes begin to climb property ladder……This fall in average salaries came as the typical deposit put forward for house purchase hit a twelve month low.
Let me give a hint from some research from my alma mater the LSE.
In 2014, UK house prices per square metre were the second highest in the world (topped only by Monaco), with especially high valuations in London and the South East. New houses are about 40% smaller than in similarly densely populated European countries.
What could go wrong?
On today’s journey we see that in spite of the fact that the official interest-rate has been at 0.5% for over six years the UK has not escaped the current international trend for lower and lower rates. This is because strictly speaking it is an overnight rate and if we look for actual rates they are going down and have been doing so for a while. Makes you think about Governor Carney’s promises of higher interest-rates as they instead fall doesn’t it?
If we now factor in some of the background which in spite of the two-year boom we have had in the UK does have areas in a depression such as real wages I continue to think the next move in the UK could easily be down. Or to be more specific a continuation of the market-rate falls. We too look trapped. In terms of economic data I am not sure that the oil price inspired boost is over but a weak GDP report has been followed by this today from the Markit PMI.
UK manufacturing growth slows as intermediate goods sector falls back into contraction
If that should continue then how long before the Bank of England follows the Riksbank? Then those believing the interest-rate rise promises might like to take a look at the back catalogue of Diana Ross.
Boy, you turn me
And round, round
Boy, you turn me
And round and round