We’re not out of the woods – yet
Frank Eve is managing director of Frank Eve Consulting
Could the mortgage market be on a roll?
Funding for Lending has produced some competition in the market and pushed mortgage rates to their lowest point ever, so the market is looking good for the this year but what about longer term prospects?
Everyone in the mortgage market hope they can, but there could still be some clouds on the horizon.
The government has spent the last two years desperately and very publically trying to get our finances in order.
We’ve had an “austerity” budget yet government debt is still growing and the UK could be on the point of losing its AAA rating.
According to the Institute of Fiscal Studies the economic picture since 2010 has deteriorated and will lead to a £65bn increase in borrowing by 2014-15. The Institute of Fiscal Studies is established as Britain’s leading independent microeconomic research institute, and as authoritative commentators on the public finances their report showed that the government’s plan A was just not working.
There are now a number of voices, suggesting that QE has gone as far as it can and there are other commentators saying that the Gilt bubble inflated by QE is about to burst. If this happens, neither the Bank of England nor the government will have the power to hold interest rates down!
Although the Monetary Policy Committee (MPC) voted again to keep interest rates on hold this month, the Shadow MPC held at the Institute of Economic Affairs (IEA) on 15th January decided by six votes to three that the Bank Rate should be raised.
The Shadow Monetary Policy Committee (SMPC) was formed in 1997 and involves a group of independent economists drawn from academia, the City and elsewhere, who meet once a quarter to discuss the state of the international and British economies, monitor the Bank of England’s interest rate decisions and make rate recommendations of its own.
A key reason for their decision was that fiscal policy seemed even further off course and risked damaging the credibility of all UK policy making. This is an important factor because if international investors are spooked interest rates will rise and could rise fast. Any lull in the storms engulfing the Euro-zone will also provide the opportunity for money to flood back to Greece, Spain and Italy and this could also affect the price of Gilts and interest rates in the UK.
In summary, rates will have to rise at some time and the market needs to be prepared for it. We are not out of the woods – yet!