A 0.5% rate hike this week will rattle homeowners as the era of cheap money draws to a close, says ALEX BRUMMER
A half percentage point hike in Bank of England interest rates to 1.75 percent looks likely on Thursday, leaving homeowners wary.
Fixed rate deals won’t last forever and those borrowers with tracker or standard rate mortgages will feel the squeeze right away.
The era of easy money is coming to an end. We can expect a new Prime Minister to watch Threadneedle Street like a hawk. Tory favorite Liz Truss has indicated she may want to change the bank’s mandate.
A half percentage point increase in the Bank of England interest rate to 1.75 percent looks likely on Thursday, leaving homeowners wary.
There is nothing wrong with that, as long as the hard-won independence of the Bank is not compromised. Any attempt to impose a political agenda on the Bank could trigger a market crisis. Truss is radical in her economic thinking. She has been questioning conventional wisdom about the Bank for several years now.
As Chief Secretary of the Treasury under Philip Hammond, she wanted a review of the way the Bank sets rates but was frustrated by the Chancellor. You don’t have to be a critic of the Bank to think it has failed in the fight against inflation. The Bank cannot be held responsible for the increase in the cost of living, which is largely due to changes on the supply side.
But it didn’t see it coming, kept its foot on the monetary accelerator and, as a communicator, Governor Andrew Bailey has failed to impress. Like the great old Duke of York, he marched his troops up the hill in November with the prospect of a rate hike, then marched back down.
Comments about wage moderation – coming from someone well protected from the tightness – were maladroit. If there was bandwidth for change at the Old Lady, what should the next Tory leader be doing? Truss wants more attention for monetary policy. The long period of low interest rates and quantitative easing from 2008 has brought monetarism back into fashion.
A massive expansion of the money supply coupled with supply constraints has created a toxic mix. But focusing solely on money growth can produce erratic results. It is possible that the functioning of the inflation target can be improved.
A primary focus on achieving an agreed-upon number, rather than complicating it with other objectives, such as unemployment, growth and climate change, could help. There is a need for a more robust nomination process for members of the Monetary Policy Committee. Too often, the Bank provides an escape route for Treasury mandarins seeking a more comfortable life.
China’s security stranglehold on Hong Kong has put HSBC’s management to the test
This can lead to groupthink. Finally, the next chancellor should be more active in dealing with overshoots (or undershoots). It was not until his last days with the Treasury that Rishi Sunak stepped up his challenge to the Bank with bolder language in his replies to the governor.
Strong action, when the cost of living rose, could have kept prices lower. As the only one of the countries’ advanced central banks, inflation in Switzerland was tamed to 3.4p percent in June. That speaks volumes for focus and discipline.
China’s security stranglehold on Hong Kong has put HSBC’s management to the test. It accepted the need to keep Beijing sweet. That’s all the more important now that 69p percent of the bank’s revenue is generated in Asia-Pacific.
It would be a blunder to let its largest investor Ping An (in which China has a stake) dictate the terms. HSBC has effectively told Ping An to take a raise, arguing that there would be major risks of a breakup, not least higher taxes and regulatory setbacks. Chief executive Noel Quinn wants to kill two birds with one stone.
He’s buying off hapless private investors in Hong Kong with the recovery of quarterly dividends and dismissing activism by setting an over-targeted 12 percent return. The bank is helped in this by rising interest margins. But with higher borrowing costs comes more bad loans, including exposure to overvalued Asian real estate.
Making a deal
Online investment platforms are all the rage and we’ve seen nonsense prices paid, such as when Abdrn bought Interactive Investor for £1.5bn, making budding investors rich. NatWest has its eyes on Quilter, a spin-off of Old Mutual from South Africa. Shares rose 14 percent in the latest trade in response to a report in The Mail on Sunday.
High Street clients long for the days when banks offered trading facilities and were allowed to advise clients on investments. Chief executive Alison Rose should do it.