FSA underestimating rate rise damage

Sarah Davidson

March 9, 2011

Speaking in London earlier today LGIM economist, Tim Drayson, claimed 90% of existing UK mortgages were on a variable rate and would be directly exposed to any rise in interest rates – a significantly higher proportion than the FSA figures.

Drayson said the UK economy was on “a knife-edge” and the “very high proportion of people directly exposed to a rate hike” should encourage the Monetary Policy Committee to be cautious about raising rates too fast.

He highlighted the risk the MPC could raise rates in line with market expectations, which have priced in four 25 basis point rises by the end of the year.

LGIM forecasts that four rate rises could push unemployment from around 8% to 10% by the year end.

Drayson said: “We don’t feel the economy has healed sufficiently in order to be able to bear this kind of pain.”

LGIM revised its own forecast for rates up, with a 25 bip hike in May followed by a further 25 bip rise in the summer, bringing BBR to 1% by December.

Drayson added: “The Bank of England should be raising rates this year but not by much. Beyond [two rises] we don’t feel the economy can bear any further monetary tightening.”

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