The truth about interest rates
Fraser Nelson 9:14amNow that Brown has copied the Tory proposal to underwrite bank loans, what's the real picture on interest rates? Since the UK debt crisis started, the Bank of England base rates have become woefully detached from the rates charged to real people. This is powerfully summarised by three graphs from Citi, which I reprint here..
Over last year, BoE base rates fell by three points. Only half of this fall was “passed on” by fixed-rate and variable mortgages, while the cost of borrowing money actually rose for overdrafts, credit cards and personal loans. As the graph shows:
The most misery will be felt by those who have unsecured personal loans – ie, the poorest. Just look at how the rate here has soared during the credit crunch, to a rate that will send debtors into the hands of the loan sharks – or bailiffs
For years, the BoE base rate was a good indicator. If it fell, the rest of lending costs also fell – and by about the same amount. But as the final graph shows, the spread now is mammoth.
This is why tweaking the base rates won’t work. The banks can't raise money at anything like the BoE base rate – just look at the utter failure of Lloyds TSB and HBOS to raise money from the market. Many UK banks are locked in to lossmaking deals (ie, tracker mortgages or low fixed-rate company loans) and suffering. They have to compensate by overcharging on the new and renewed loans – and must keep doing so until they can raise money more cheaply. Even the Tory proposal of underwriting bank loans, would probably still mean rates at LIBOR+100bps. Cheap credit is not coming back. End of story.
Many people are waiting for things to get back to normal in the credit market. But perhaps they already have
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Comments
kinglear
January 13th, 2009 9:44amYou are absolutely right. This government, never having had a clue about economics, could only think in Stalinist " punish the rich" terms when setting the terms for the Banks bailouts. At 12% the Banks basically can't make money. They HAVE to make money to get back to lending.In a sense, we should all be allowed to go over our overdraft limits so the banks can charge us £25 every few days and 30% interest. Very quickly they would be back in profit and we would learn to stay within our limits.
There won't be any lending whilst its unprofitable for the Banks to do it. The smartest move the Fed has made is effectively giving the US banks money for free - not hard to make a profit at that cost.
If Brown and Darling really wanted to get things moving, they should declare an interest holiday & forgiveness on the money the Banks here have had. That really would be doing "whatever it takes"
Ian C
January 13th, 2009 10:08amUntil: -
1) interest rates rise again and
2) Toxic debt is taken out of balance sheets,
capital cannot be raised and 'normality' will not return.
Cameron/Osborne need to say this because it ain't their problem (yet).
The choice is between zero interest followed up by 'quantitative easing' (followed by rapid inflation rise) and higher interest rates and market incentives - the prospect of buying assets cheap in advance of the recovery.
The former will start a recovery sooner but end in another inflationary bust. The latter will slowly but surely return the economy to a sustainable recovery.
Which would you rather? My preference is the latter because the latter is market driven and the former governemnt driven - and they always end up going over the cliffs.
David Bouvier
January 13th, 2009 10:18amAgreed that "cheap credit is not coming back" - and the whole exercise illustrates how fatuous is the notion that the government 'runs' the economy or sets interest rates in general.
But at the moment lending is being rationed - the supply of money to lend is inelastic and price of borrowing and/or credit restrictions will rise to whatever level crushes demand sufficiently.
Similarly, in the housing market pricing on a low volume of sales is likely to be undershooting the value when distress among lenders has been worked through.
Once the distress amongst lenders is worked through, we can get to a post-crunch market with prices and volumes somewhere between now and pre-crunch.
This is not yet the new business as usual in housing finance.
lola
January 13th, 2009 11:33amI'm so sorry. Oh woe is me I am so so sorry! Oh woe oh woe.
I confess I am guilty. I got dozens of clients to take on tracker mortgages at BoE base rate plus 0.5% when they were available. I am so so sorry. If I'd've realised how much pain I was going to cause the banks I would not have sold them to dozens of clients - I'd've sold them to thousands.
Serve the useless bastards right. If I saw this coming why couldn't they?
Sean
January 13th, 2009 12:26pmHold it for a sec.
The Lloyds HBOS thing was a dud because the underwritten shares would be purchased at something like 173p while the market value was 133.
In any case, with the government as the underwriter the bank was still going to get capital.
The banks are now swimming in cash but are not lending it out. Go figure.
Fraser Nelson
January 13th, 2009 1:14pmSean, what makes you think they're swimming in cash? Have you seen RBS' balance sheet? They have to borrow every penny they lend, they are massively over-extended - hence the crash - and until they can borrow more cheaply they wont be able to lend cheaply...
Chris paul
January 13th, 2009 1:41pmAnd your point is? And we didn't need Lola to tell us to go tracker.
Obvious which direction rates were going with some signs of the extent too.
Banks will have to start lending again with or without guarantees. Credit is their main commodity. They cannot make much money without selling their core product. But they may be hanging around waiting for incentives and guarantees - as well as taking a breather and getting themselves into better shape.
Lola
January 13th, 2009 3:31pmThe reduction in BoE base rates is one attempt to enable the banks to have a commercial spread between borrowing and lending that allows them to rebuild their balanmce sheets whilst not caning borrowers.
But, the 'regulators' are simultaneously demanding that they increase their reserves. Hence cancelling out any advantage.
The banks balance sheets are seriously over extended, but do not expect the to admit that and apologise when they call in your overdraft, even if it is within an easily manageable level for you.
Mr Paul, you'd be surprised how many people needed convincing that a tracker mortgage was a good idea. Most of them had been so spooked by previous memories of hyper inflation under labour that they were more favoured towards fixed rates.
chris
January 13th, 2009 9:32pmCorrect me if I'm wrong, but apart from Northern Wreck I don't think the banks have received a penny of taxpayer money yet.
Seasurfer1
January 13th, 2009 11:34pmThe Gov will start creating Book Money (PRINTING FICTIONAL MONEY LEDGERS)on Wednesday. This is printing money and will be the start of the Great Inflation. The USA has been doing it for some time.