As expected, base rates are down half a point to 1.5% – so, yet again, drinks are on those lucky few with variable mortgages. I suspect they’ll hit 1% before Easter. Then what? “Nobody is talking about printing money” says Alistair Darling – but this is a little Brownie. Quantitative Easing – the equivalent of printing money – is being spoken about by everyone and can come in many forms. The Bank of England can start buying stuff – Treasury IOU notes, company bonds, or even shares. So you’d attempt to lower market interest rates by boosting asset prices. Darling is right: he can fund the deficit through issuing gilts, then have the BoE buy the gilts without another banknote printed. Or the BoE can order the state-owned banks to start lending more money to less credit-worthy people, thereby shovelling more cash into the system. But this is how Fannie Mae got into such trouble: private banks didn’t compete with non-commercial lending decisions and the state ended up taking a huge chunk of the mortgage system.
Anyway, there are a million ways to debauch the currency without turning on the printing press. With the BoE running out of rate cut options, you can bet Brown will be as inventive as ever.
UPDATE: The Royal Institute of Chartered Surveyors said the rate cut won’t make a blind bit of difference in the mortgage market. The cut, it says, is “unlikely to provide any meaningful encouragement for banks to increase the availability of finance to either households or businesses. Indeed, the risk is that lenders are set to become even more restrictive over the coming months in the face of the worsening economic climate. With many first time-time buyers unable to find the finance to take an initial step onto the housing ladder and existing owner-occupiers needing to move similarly blighted, the time has come for the government to take direct action to restore an orderly property market.”
In other words: forget your rate cut, and let’s move on to Quantitative Easing – ie, force Northern Rock etc. to lend at low, non-commercial rates. In my view, RICS is being hysterical and asking for a bailout which it should emphatically not have. Greenspan spent ten years trying to cover up economic slumps with cheap money, and look where that got us! All eyes are now on next month’s BoE meeting: that’s when the other weapons may be wheeled out.
But the RICS is right to point to the disconnect between base rates and mortgage deals. Here’s the 75%LTV two-year fix, courtesy of Graham Turner:
Comments