Deficit danger for mortgage rates

Sarah Davidson

April 29, 2015

John Charcol’s senior technical director said certainty and confidence in the UK’s next government was critical to keeping markets stable and rates low.

He said: “As long as the market continues to believe in the government’s deficit reduction plan interest rates will remain low. And as more maturing debt is refinanced at cheaper rates the cost of financing the increased borrowing can still actually fall.

“The danger is that the market loses confidence in the government, which is a clear risk post-election, depending on the result.”

Tony Ward, chief executive of Clayton Euro Risk, agreed with Boulger’s assessment and said: “What markets like least is uncertainty. They prefer a world performing in a predictable way according to a sensible plan.

“The Tories have made economic competence the central plank of their election campaign and the International Monetary Fund has thus far been very supportive of government action to reduce the deficit and regenerate economic activity.

“A new government, whoever they are, faces the task of convincing them that they know what they are doing and are competent.”

Ward predicted that market rates would start to wobble increasingly over the remaining days of electioneering ahead of the country going to the polls on 7 May.

He added: “My guess is that if the Tories get in with a majority the markets will settle quickly. Any other outcome will be somewhat more volatile. At least for a while.”

Their comments came as Liberal Democrat leader and deputy prime minister Nick Clegg revealed an economic “red line” for potential coalition negotiations calling for a “stability budget” within the first 50 days of the next parliament.

Issuing a statement last night Clegg said: “The only certainty about this election is that neither Labour nor the Conservatives will win a majority. So making sure the next government is safe and stable is the first and biggest challenge.

“The Liberal Democrats have proved that we will do that. We will not let our government be dragged down by uncertainty and instability. We will be the guarantors of stability – just as we were in 2010.”

He added that his party has made a commitment to balance the books in “a timely fashion and in a fair way”.

Earlier this month the IMF crushed Conservative manifesto claims to move the public deficit into surplus in 2018-19, suggesting it would be impossible for any government to pay down the UK’s £90bn debt by 2020 with growth only moderate and significant pressure on public spending.

Rather than the deficit moving from £90bn, 5% of national income, in 2014-15 to a surplus of £7bn in 2019-20 the IMF forecast a deficit of £7bn in 2019-20 – £14bn worse than Tory chancellor George Osborne’s Budget forecasts.

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