Is it to be yet more interest-rate and mortgage rate cuts for the UK?

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.

Expansion now 72 months old. Average post-1980 expansion = 76 months. Time for to cut rates. Oops, they forgot to raise them! Hmm.

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

Inequality alert

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.

Upside down
Boy, you turn me
Inside out
And round, round
Upside down
Boy, you turn me
Inside out
And round and round


20 thoughts on “Is it to be yet more interest-rate and mortgage rate cuts for the UK?

  1. Deflation is expected so real interest rates are still at 4% or so if nominal are at 1%. Oh and the UK is going to collapse.

    Happy may day comrades.

    • Hi Benfitzg

      Happy MayDay plus one! As to real interest rates the latest inflation expectations survey (March) by the Bank of England told us this.

      “Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 2.8%, compared with 3.0% in November.”

      So with a 5 year Gilt yield of 1.4% we have a real yield of -1.4%.

      Thus once the oil price gains are gone it will be back to normal for the UK I think….

      • good reply, interesting. I guess people will still be willing to buy gilts because they can think of no other asset that will return *better* than -1.4% with some certainty.
        It’s a mad world. Asset prices detached from wages – why are people bothering?

  2. I like the “punch-bowl” analogy.
    ECB is doing Polish Vodka and cocaine.
    ECB “Nous sommes Charlie!”

    • Now the punchbowl is only available to partygoers who borrow money in order to purchase a drink. The good news is that interest rates are set low enough to keep the party going. What a scam.

  3. Hi Shaun,
    Trapped sums it up. I’ve read many comments in many blogs over the last 6 years and a consistent theme in many of them is that lowering the base rate below 2% is a trap that the MPC will find it very hard, even impossible, to escape from. ( John from Hendon on the BBC website springs to mind)

    The last 6 years has demonstrated that TPTB have an enormous capacity for perpetuating ZIRP/NIRP, QE, HTB etc. Indeed, to paraphrase a well known banker – ‘whatever it takes’ has become – whatever it takes, for as long as it takes.

    We now know that the recovery has not followed the usual path. The next bust is already due and we’re not ready for it. This time it really is different because the 2007/8 bust was not an economic one. It was a financial bust – the size of which is a secret…… The final bill is still not in. No wonder it looks like a bankers’ version of Alice.

    • Hi Eric

      Another way of looking at the problem is via the passage of time. Keynes was aware that his policies were borrowing from the future which is why he argued for paying back in the better times. However whilst elements of his theories are being used the catch is that if Japan was any guide then the timespan of the crisis was likely to be of the order of a decade or more then can kicking for 2,3 or even 4 years had an obvious problem. This is why I introduced the “more,more more” theme and is also why Paul Krugman looked favourably on an alien invasion.

      So we go “on and on and on” but as we do so we dig ourselves deeper into the mire for three reasons.

      1. We get economically weaker in terms of balance sheets
      2. The establishment are ever more unlikely to admit their errors as they get greater
      3.Sooner or later another recession will arrive.

      • Thanks Shaun,
        I wonder what Keynes would have thought of QE and near-zero interest rates. There’s a difference between borrowing from the future and stealing from the future. It also seems that monetary policy is somehow “disconnected” at this rate level. Look how much inflation has moved while the Base rate hasn’t over the last 6 years

        Krugman had a point. How can a problem caused by cheap easy money be solved by making it even cheaper. Of course Krugman used his Alien Invasion argument because he couldn’t suggest that WW3 would solve the economic problems in the US in 18 months. Even so, maybe in 2007/8 taxes should have been hiked to astronomical levels, the base rate set no lower than 2% and ( like Viv Nicholson ) HMG should have said they will spend….. Who cares about inflation or the deficit when the banks are about to sink the entire system.

        But that was years ago, now we are even deeper in the debt strewn woods. And, like Alice, we are looking for any path that will take us out while getting weaker by the year.

  4. Shaun,
    Banks doing their bit to get the sub prime borrowers into mortgages and keep the housing bubble going?
    What are the risks when the £ devalues postelection ?

    • Hi Chris

      I think that there are enough problems with banks going back down the subprime road don’t you? Also it is happening with house prices higher and real incomes lower. It is not as if we do not know what happens next.

      Indeed we do seem to have used the TARDIS of Doctor Who to jump back a decade in time.

      “Consumer credit increased by £1.2 billion in March, compared to the average monthly increase of £0.9 billion over the previous six months. The three-month annualised and twelve-month growth rates were 7.0% and 6.9% respectively.”

  5. ah , this is current trend for the Banks to “look good” to the poor old citizen …..

    as stated all those charges and fees will put most off whilst the basic mortgage remains relativlely high

    When will I get the 0.5% mortgage ?

    when all hell freezes over I expect , that rate is for the Big Boyz

    meanwhile if you borrow off credit cards the times are not changing , were back to the 90’s at 18 /25 and 30% rates ……. gotta pinch a pocket or two , eh ?

    after the elections and the rise of Oil going back upto 70-80$ range , inbaked inflation taking off , fraud revealed in employment stats

    but MSM will proclaim ” all is well!” ” back to the TV and fast food folks, nothing to see here …..”

    yes I do expect BoE to reluctantly ( maybe) drop to 0.0% or MIRP – 0.25-0.5% but I dont expect us plebs to enjoy the show then ……

    Ah more popcorn , corn futures , blimey mate !


    • Hi Forbin

      I think that for the likes of us negative interest-rates were supposed to begin and end with any savings we have! The extension into borrowing that has been seen in Europe as 3 month Euribor went negative meaning that some mortgage rates must be very low/zero and no doubt some are negative, was probably happenstance.

      As time goes by we will see more negative savings rates and I have no idea how the Bank of England arrives at an interest-rate for new savings of 1.49%!

  6. ‘If we look back will we think that right now we are still in an economic depression?’

    In terms of wages,most definitely.The whole ‘recovery’ has been a long slow drop in real wages,with 3.3 million households on tax credits of some sort,700,000,record numbers in part time and increasing numbers in the holding pen of higher education.

    Generating GDP growth of the back of govt spending and bumping up imputed rents is more Gideon Gono than anything else.

    • Hi Dutch

      The irony as I have written more than a few times is that economic thought wanted this in other words a labour market like that of Germany. We have much better employment/unemployment numbers than would have been the case in the past but much weaker real wages as a price for that.

      The missing next step or link is the reform to power us forwards and use that internationally. In some ways we have as exhibited by Tech City in Islington and the emigration of skilled your people from Europe to here. But it is patchy and in my opinion very badly measured.

  7. Hi Shaun,
    As you say these headline grabbing rates are only a good deal for a limited number of borrowers with high set up fees and requirement for a large amount of equity. Not only that but now you can be too old to get a mortgage at 50 being deemed too close to retirement age so the reduced payment period (15 years in this example) pushes you over the affordability threshold. With the age of the average first time buyer reported as nearly 40 the window of opportunity to buy a house is pretty short. The whole system is so dysfunctional.

    • Hi Zummerzetman

      I had a conversation with a middle manager in the NHS recently which went as follows. The changes in the pension scheme mean that she will now retire later so she contacted her mortgage provider to see if she could extend her mortgage and the answer was of course no! She was playing devils advocate a little but there is a serious point underlying this as you say. The window of age opportunity for taking out a mortgage seems very short these days…

  8. Hi Shaun

    You surely realise that, by now, the CBs will only raise rates when they are forced to; it is pointless analyzing and parsing what the CBs say because it is meaningless and simply all talk.

    We have a debt based economy that can only function by extending debt into more and more sub prime areas. The only way this can carry on is if the repayments are, at least in the short term, manageable, hence the need for ever lower IRs.

    Also as you know the trend to lower and lower rates is actually quite a long one, going back 20 years (?) so this is nothing new, except of course that we have now reached the ZLB. If, or will it be when, we reach negative rates expect regulations banning withdrawals in cash and a hike in rental rates for safety deposit boxes.

    In my view we have a structural demand deficiency and, when we reach “peak debt” the Ponzi will pop. Whether any sensible policies will come out of this I cannot say but I do have my doubts.

    • Hi Bob J

      The interest-rate trend is more like 30+ years I would say as the Base Rate peak was 17% back in July 1979 and it was more relevant then. As to interest-rate rises these days being enforced I agree entirely and the Bank of Russia has proved that by cutting as soon as it could (14% to 12.5% this week..).

      As to cash my tutor for a year at the LSE Willem Buiter is already on the case.

      “In summary, we therefore conclude that the arguments against abolishing currency seem rather weak.”

      Oh and I do not think he is using the royal we even,ahem, today…..

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