george’s secretary | E+ | fake images
There is an economic idiosyncrasy to the UK that makes it “one of the most vulnerable countries in the world right now”, according to an investment strategist.
Mike Harris, the founder of Cribstone Strategic Macro, argues that a major problem for Britain is that its mortgage market is “very short-term”. While people in the US and other parts of Europe like long-term mortgages, many Britons opt for short-term loans of less than five years. Tracking mortgages are also popular and fluctuate with the Bank of England base rate.
Harris told CNBC on Friday that this was a problem, as rate hikes would immediately trigger losses in household income, while it might not actually address the problem of inflation. He explained that the UK was an “inflation importing” country, so the effect of interest rate hikes by the Bank of England was not simply a rebalancing of supply and demand that would slowly slow down the growth of consumer prices.
“Here we’re not really dealing with a pure situation where we’re trying to slow down the economy, ultimately we’re trying to rebalance expectations, and the UK is an inflation-importing country… So we’re not effectively in a position where we are effectively free to just focus on supply and demand,” he said.
He added: “We are stuck in a situation where global inflation is driving our inflation at this stage, we have to hit the consumer and instead of just reducing the propensity to spend in the future, we are actually taking more money out of homes”. income, which does not happen in the United States”
the bank of england raised interest rates by a quarter of a percentage point on Thursday, raising its base interest rate to 1%. Those are the highest interest rates since 2009 and it was the BOE’s fourth consecutive hike. The central bank also forecast inflation to hit 10% this year, with rising food and energy prices exacerbated by Russia’s unprovoked attack on Ukraine.
Harris said he had twice requested data from the Bank of England on how much lending in the country was set for two years and how much was set for five years, but said he was told the central bank did not stick to that. information.
Harris argued that it was “absolutely insane for a central bank to fail to appreciate the economic impact associated with every rate hike.” He explained that consumer behavior is unlikely to change much in five years, but it will in two years.
According to data from trade association UK Finance, 1.5 million fixed-rate mortgage deals are due to expire in 2022, with another 1.5 million due next year.
In data released Friday, investment platform Hargreaves Lansdown calculated that someone who remortgages at the end of a two-year fixed-term deal, following the latest interest rate hike, could see their monthly payment increase. £61. If the base rate reaches 1.5%, Hargreaves Lansdown calculated that it could add £134 to their monthly mortgage payments. According to a survey of 2,000 UK adults, conducted on behalf of the platform in April, more than a third of people would find it difficult to pay those additional costs.
Harris said that because of the current rate hikes “we’re in an environment where we’re probably going to destroy more demand than we should because the Bank of England and [former governor] Mark Carney didn’t do his job like he should have.”
He said this dynamic was similar to the Federal Reserve in 2007, just before the start of the global financial crisis, in that they “allowed people to take out mortgages when they knew they couldn’t afford them if house prices fell because they had to refinance.” , so there’s an inherent unsustainability.”
Harris added that the UK was now at a stage where it was “facing the music”.
“I would say the UK is one of the most vulnerable countries in the world right now because of that dynamic and the fact that central bank governors didn’t do anything about it, they might still have some time,” he said, arguing. that if policymakers had the means to extend the duration of this debt now, they should be “actively” doing so.
A Bank of England spokesman declined to comment, but pointed to CNBC on recent remarks by Governor Andrew Bailey and Chief Economist Huw Pill.
In the past, two-year term mortgages have been popular because they tend to be cheaper due to the shorter loan period. However, UK Finance said the popularity of five-year deals had been growing with 50% of fixed-term contracts in force in 2021 having this duration, while 45% had two-year contracts.
Bank of England data last week showed the “effective” interest rate – the real rate of interest paid – on new mortgages rose 14 basis points to 1.73% in March, the biggest rise since at least 2016. , according to Bloomberg.
Speaking on CNBC’s “Street Signs Europe” on Friday, Bank of England Chief Economist Huw Pill also noted that the rise in inflation was being driven by external shocks.
He said it was “uncomfortable” for central bank members to forecast an inflation rate of 10%, which is well above the long-term target of 2%.
“Of course, that discomfort needs to be seen in the context of the real impact of lowering the cost of living on households and businesses here in the UK, it is more painful for them than discomfort from the politicians’ point of view.” Pill added.
He explained that the Bank of England was trying to use monetary policy to try to ensure that those drivers of inflation do not result in persistently higher prices and create a stagflationary environment like the one in the 1970s. But he said the central bank wanted reduce inflation to target without introducing “unnecessary volatility in the economy”.
Bank of England Governor Andrew Bailey told CNBC’s Geoff Cutmore on Thursday that the UK was seeing a “unprecedented big impact to the real income of this country from abroad”, in commercial matters.
Bailey also defended the central bank’s more cautious approach to raising interest rates, with three dissenting members of his MPC arguing that the BOE should be more aggressive with its hikes.