The situation concerning interest-rates is in quite a state of change right now. The trend towards negative interest-rates has gathered pace particularly in Japan where this morning Governor Kuroda was reported as saying this in an interview with the Asahi newspaper.
There is plenty of room to cut interest rates further. But achieving negative rates itself is not our primary purpose,
He went on to tell us how they would work.
Kuroda said the decrease in interest rates for housing and other loans has, in fact, been much larger, and the economic impact of that trend is therefore that much greater.
So great in fact that he had to introduce negative interest-rates or “More,More, More”. He also hinted at more QQE ( Qualitative and Quantitative Easing) in spite of this being the state of play.
@RANSquawk: BoJ Governor Kuroda says BoJ balance sheet is at 76% of nominal GDP vs. Fed at 25% and the ECB at 26%
Of course Governor’s Kuroda’s credibility plummeted when he introduced negative interest-rates only a week or so after denying he had any plans to introduce them. These days he is treated like this.
There is a cycle here where Japan eases policy again and this adds to the promised reduction by the European Central Bank in March. This will put quite a bit of pressure on the Bank of England to follow suit especially if the UK continues to see its economic growth fade.
Yesterday the Bank of England Governor was grilled on his policies by Parliament and told them this according to the Financial Times.
We could cut interest rates towards zero. We could engage in additional asset purchases, including a variety of assets,
You may note that this is now Forward Guidance Mark 14 as the Forward Guidance Mark 13 finds itself on the rubbish heap.
At the BoE’s quarterly inflation report a few weeks ago, Mr Carney told reporters that the next move in rates was “absolutely” more likely to be up than down, adding “the whole MPC stands by that”.
Perhaps we should summarise the Forward Guidance experience like this.
They can fly upside with their feet in the air,
They don’t think of danger, they really don’t care.
Newton would think he had made a mistake,
To see those young men and the chances they take.
Those magnificent men in their flying machines,
they go up tiddly up up,
they go down tiddly down down.
Moving back to specifics Governor Carney has plainly learned nothing from his retreat from telling us the lower bound for UK interest-rates was 0.5% as he now defines it as 0%. This requires an Alice In Wonderland style view of Switzerland, Sweden,Denmark, Japan and the Euro area! Mind you he also seems unaware of the views of someone who sits next to him as Gertjan Vlieghe confirmed my opinion that he could easily vote for a policy easing.
I have to say that I have relatively little tolerance for further downside surprises and should downside surprises continue then I think we will get relatively quickly to a point where I would find it appropriate to respond to it.
According to Governor Carney that means the next move is likely to be up. Perhaps Lewis Carroll was prescient about him.
How puzzling all these changes are! I’m never sure what I’m going to be, from one minute to another.
A Sterling Crisis?
One thing that a Bank of England Governor should not do is talk the UK Pound down. This was either very amateurish or part of a Baron Mervyn King style plan to push it lower under the cover of the Brexit hype. Either way the UK Pound £ dipped into the US $1.39S this morning.
A lot of care is needed here as when it falls the UK Pound £ has a tendency to plummet as it is currently demonstrating. Also the fall is mostly but not entirely against the US Dollar as the fall to 1.27 versus the Euro demonstrates. So looking only at the US Dollar exacerbates the effects but the Governor should remember the World War 2 dictum.
Loose Talk Costs Lives
Lower Mortgage Rates
The heat is on here as the UK ten-year Gilt yield has fallen to 1.37% this morning. As I note how extraordinarily low this is to someone like me who has followed it since the late 80s I also look to the shorter yields which influence mortgage rates. The five-year yield has dipped to 0.71% which if maintained will lead to cheaper fixed-rate mortgages.
Fixed Rate Mortgages
These have been falling as Yahoo Finance describes.
The average two year fixed-rate mortgage has dropped from 3.09pc a year ago to 2.55pc today according to Moneyfacts, continuing the overall downward trend seen since the end of the financial crisis.
Tucked away in the cheerleading is this if we go to the source Moneyfacts.
For example, the average two-year fixed rate at 90% LTV has fallen from 4.27% two years ago to just 2.99% today, which not only marks an impressive drop in its own right, but is also the first time the average for this sector has ever dipped below 3%. The average two-year fixed rate at 95% LTV has also dramatically fallen, dropping from 5.22% to 4.17% over the same period.
Ah so the loans which post credit crunch were never going to be offered again are not only back but are also seeing government encouragement and lower mortgage rates! I also note that there are issues for the banks doing this as they have a track record of piling in at the top of the market and many of them as I discussed yesterday are still troubled,
Five years ago, there were just 239 mortgages available at 90% or 95% LTV, but this had risen to 671 by this time last year – and availability has increased by 174 in the last 12 months alone, with 845 such products now on offer.
The UK taxpayer of course is the back stop vis a variety of routes. If we look more generally we see that mortgage rates overall are falling to record lows.
The figures show that the average two-year mortgage rate has fallen by 0.02% from January to stand at 2.54%, the lowest rate ever recorded,,,,,,,,, It’s a similar picture in the five-year sector, which saw the average rate fall by the same 0.02% to a new low of 3.25%
If we see more of what we have seen this week then Moneyfacts will be right about this.
Not only are mortgage rates already at record low levels, but there’s the chance for them to fall further still in the months to come.
At this point there will be some wailing and gnashing of teeth from those who followed the first ten or so versions of the Forward Guidance of Mark Carney and remortgaged to avoid higher interest-rates. He led them a sorry dance. However I completely disagree with Moneyfacts about the banks here.
The almost complete absence of risk, at least at wholesale level,
The last boom saw all sorts of products appear which reflected the use of the word “innovative” in the Irish banking boom and bust. Some have been less kind than me and called them liar loans. Anyway take a look at this from Bath Building Society.
What if you find your ideal home, but your income isn’t quite enough to get the mortgage you need? Well, if the property has a spare bedroom, our Rent a Room Mortgage might be just the answer. If you rent out a spare bedroom, we will take into account the rental when deciding whether we can offer you the mortgage you need.
Apparently this will let someone borrow £160,000 with an income of £26,000 or a ratio of just over 6! If you look at this maybe you could borrow more than that.
Up to 50% of the loan amount can be covered by the rental income from letting a room in the property.
For the honest there is the risk of void periods – no rental income – for the less honest then there never was any real rental income. What could go wrong?
Over the past 3 and a half years the policy of the Bank of England has been to push mortgage interest-rates lower. The initial impetus was driven by the Funding for Lending Scheme which has an initial downwards impact of 1% and I note the Bank of England felt it headed towards 2%. This lit a light under the UK housing market which of course is not captured by the official inflation figures so as well as generating some genuine growth it also records what is inflation as economic growth. The law of unintended consequences or perhaps the phrase “be careful what you wish for” has come into play as the international trend to negative interest-rates is pushing them still lower.
Added to this as you can see above we seem to be returning to the era of easier credit which led to the credit crunch itself. All the never again promises have gone out of the window or into the lodgers bedroom. Meanwhile the Bank of England claims it is both “alert” and “vigilant” which we have learned means it is unlikely to be long before the next U-Turn.
12:45 pm update
In an intriguing example of the oddities of probability I received a letter today informing me of this.
All LendInvest loans are secured against a property, providing investors with a fixed net return of 5+% pa*.
In a world of increasingly negative interest-rate many will be tempted after all what can go wrong?