Why falling base rates have lost their sting
Fraser Nelson 6:20pmNow the Fed has cut US rates by another quarter, what’s next? The City expects UK rates to fall to 4.75% by year-end. Now and again, Gordon Brown likes to boast that he is able to reduce interest rates – unlike the Tories in early 1990s. One of Magician Brown’s favourite tricks is the “false proxy” – saying “base rates are falling, so homeowners can rest easy.” But as I have blogged before, the distinguishing feature of this credit crunch is the decoupling of the base rate from de facto mortgage rates, as the graph below from John Charcol shows. We are entering new territory, and the old financial relationships are not a reliable guide to what lies ahead. In December, the RICS forecast 45,000 repossessions this year – the highest since 1992. The way things are going, I suspect this figure will be revised upwards.
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Ian C
March 17th, 2008 7:09pm Report this commentUntil the world knows what he value of assets commonly held by individuals and the banking system are, interest rates (the sost of borrowing) are irrelevant. The more important thing is the value of the $ in which everything is priced. Speculators are pushing the price of 'must have' assets - oil, wheat, industrial metals and gold - because those who sell them can demand a fixed value regardless of $ exchange rate. So, soon the markets will realise that $ interest rates have to rise to alter expectations, not be slashed uselessly. It's about defending the financial system to the detriment of asset values. As one blogger has today said about UK property - if average houseprices are £200k and incomes £25k and lenders now require a min. of 30% deposit the value of UK property is not going to stay at previous levels for long. That logic can be translated around the world to all other assets. It's like watching a slow train crash and all we can do is stand and watch.
David
March 18th, 2008 8:58am Report this commentA reason for a lower base rate from the BofE for the banks but higher mortgage rates from the banks to the rest of us is the urgent need for the banks to make profits, rebuild their reserves and offset losses on past bad lending decisions. It is going to be a long and painful haul.
Brett
April 10th, 2008 10:43am Report this commentThe BOE will cut rates again today no doubt, but the banks are aiming to claw back their losses from the sub-prime crisis. The rate cut will have an impact but not until later in the year. As for houseprices, they are likely to remain static while rents will rise. www.baserateday.com
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