Banking

Weekend reading: the upside of our high inflation – Monevator

What caught my eye this week.

A few months ago I wrote about stress testing your mortgage ahead of higher interest rates. The threat has hardly abated, with the Financial Times noting that:

Borrowers now looking for another offer as their fixed period comes to an end will face much more expensive terms.

Average rates on a two-year fix have nearly doubled from 2.24 per cent a year ago to 4.24 per cent this week, according to finance website Moneyfacts.

The FT article (search result) adds that banks and building societies have pulled lots of mortgage products off the market, and they are being particularly quick to yank their most competitive mortgage deals.

The best table-topping rates might only be available for a few days before capacity is exhausted.

Hunting high and low

So far, so hairy.

Yet arguably we mortgage holders have never had it so good.

Because what would be spectacularly odd to any time traveler from the 1980s – who oddly chose to gawp at yield curves rather than, say, the iPhone – is the clear blue water between inflation and interest rates.

The UK CPI inflation figure favoured by the government and the ONS dipped unexpectedly this week. But it’s still at 9.9%.

The officially semi-defunct RPI figure that remains widely used in contracts is 12.3%.

Meanwhile the Bank of England’s Bank Rate is only 1.75%!

True, Bank Rate will surely be raised to 2.25% next week – it would already be there were it not for the period of national mourning – and given the state of core inflation I wouldn’t rule out a hike to 2.5%.

The pound falling adds even more pressure to raise rates. Sterling weakness makes imports (and commodities) even dearer – and we import a lot in Britain.

Yet even a 2.5% Bank Rate would be sat 8-10% below inflation, depending on how you measure the latter.

Whereas for most of my life – up until the financial crisis – interest rates ran well above inflation:

Source: Schroders

The Bank of England mandarins are of course familiar with this graph.

But from the start, this current inflationary episode has been seen as more a problem of supply than demand.

And despite a shocker in the US data this week, there are signs the inflationary impulses that set this ball rolling are, well, rolling over.

Inflation is still expected to fall back towards target by 2024. 

The sun always shines on TV

As for demand, does anyone have a sense the UK economy is roaring?

Not me.

Perhaps the housing market has been running a bit hot. But aside from that it would be a watered-down punchbowl that the Bank of England would be taking away were it to get rate-rise happy.

Even an expansionary fiscal plan from the new UK chancellor in his Budget next week would only be giddying-up what seems like a pretty stagnant economy.

It’d probably add a smidge to long-term inflation expectations, because just like last week’s energy relief plan it will likely add to long-term borrowing.

But I don’t see the Budget setting off one of those Tory booms that gets named after the chancellor later when the blame is doled out. (Barber, Lawson…)

An end to conflict in Ukraine would fire up the old animal spirits. But that might equally reduce some of the global price pressures and supply chain issues that were already easing before Putin sent in his tanks.

(Of course I’d take it regardless of its impact on the price of eggs or mortgages).

Take on me

Odd as it seems then, I’d bet five-year fixed rate mortgages will peak at around 4% – at least for this cycle.

Even with inflation running at high teen double-digits for a short while.

In other words, it probably won’t get much worse from here, from a borrower’s point of view.

Of course your guess is (almost…) as good as mine. Events can do a number on economic expectations, anytime, anywhere.

What’s more the Bank of England’s commendably honest and downbeat talk has not been matched by as aggressive a campaign of rate rises as we’ve seen from some of its peers. Maybe the rate-setters will lose their nerve?

Time will tell, but for now inflation is fast paying off your mortgage in real terms.

Enjoy it while it lasts!

From Monevator

Expected returns: Estimates for your financial planning – Monevator

From the archive-ator: Financially independent in ten years: a plan – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!

Mini-budget expected on 23 September to reveal new PM’s fiscal plans – Sky News

UK inflation falls to 9.9%, but still close to a 40-year high – Reuters

Pound hits 37-year low as retail sales slide – BBC

The Queen’s death could tip the economy into recession – Yahoo Finance

Why the King won’t have to pay inheritance tax on his estates –

Britain’s lowest-paid workers say finances have never been worse – Guardian

Switching to renewables could save the world trillions, Oxford study funds – BBC

World Bank warns higher interest rates could trigger global recession – Guardian

Weekend reading: the upside of our high inflation - Monevator - american banker conference - Banking - UK Prime News

Why you should continue to own equities after you retire – Vanguard

Products and services

Natwest and RBS offer £175 switching bonus to new and existing customers – ThisIsMoney

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

‘Confirmation of payee’ checks spread, but millions still unprotected – Which

If you must have a second home then you also need a ‘guy’ – MarketWatch

What happens if you don’t pay your bills? [Podcast]Which

City centre homes for sale, in pictures – Guardian

Comment and opinion

How the worst market timer in history built a fortune – Compound Advisors

Why medics – and everyone else – can benefit from a high savings rate – White Coat Investor

Is it best to take the 25% tax-free pension lump sum in one go or in chunks? – ThisIsMoney

If you want to be wealthier, let go – Darius Foroux

Should you invest more after a market decline? – Of Dollars and Data

Is the obesity epidemic a threat to your retirement? – A Teachable Moment

The pros and cons of multi-generational living – Humble Dollar

The most dangerous phrases in personal finance – Thomas Kopelman

Swedroe: look beyond expense ratios when choosing index funds [Nerdy]TEBI

Working late mini-special

The over-65s forced to join ‘The Great Unretirement’ – Guardian

Can’t stop working – Humble Dollar

Tax traps warning for over-65s returning to work [Search result]FT

Crypt o’ crypto

The Ethereum merge has happened. What does it mean for investors? – CoinDesk

NFT traders pay more for pretty cryptopunks [Research, PDF]SSRN

Naughty corner: Active antics

Weekend reading: the upside of our high inflation - Monevator - american banker conference - Banking - UK Prime News

How to get venture capital returns from liquid public securities – Sparkline Capital

[US] inflation’s terrible, horrible, no good, very bad day – Advisor Perspectives

Why we (over) trade – Morningstar

What does the post-crash venture capital market look like? – Both Sides of the Table

How the ‘risk-free’ US Treasury Market has become more fragile – New York Fed

Kindle book bargains

Winners: And How They Succeed by Alistair Campbell – £0.99 on Kindle

I Will Teach You To Be Rich by Ramit Sethi – £0.99 on Kindle

How To Own The World by Andrew Craig – £0.99 on Kindle

Quit Like A Millionaire: No Gimmicks, Luck, or Trust Fund Required by Kristy Shen – £0.99 on Kindle

Environmental factors

Patagonia’s billionaire owner gives away company to fight climate change – Guardian

The mysterious, vexing, and engrossing search for the origin of eels – Hakai

Climate change is tweaking the taste of wine – BBC

Shell names renewables chief as its new CEO – ThisIsMoney

How global investors reacted to the Paris Agreement on climate change [Research, PDF]SSRN

Off our beat

Remembering Black Wednesday: part one [Podcast]A Long Time Ago in Finance

The future of fast food – Slate

Watching the lying-in-state: a meditative quality all of its own – BBC

A mother avoided thrills, then her son discovered roller-coasters – Walrus

The rise and fall of General Electric [Podcast]Business Breakdowns

Aleatory – Indeedably

And finally…

“It’s the job that’s never started as takes longest to finish.”
– J.R.R. Tolkien, The Lord of the Rings

Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Interactive Investor. We may be compensated if you pursue these offers, but that will not affect the price you pay.



Most Related Links :
UK Prime News Latest News Sports News Finance News Automobile News

Root link

Related Articles

Back to top button