Mortgage rates to fall

Posted on 12 February 2016 by Ray Boulger

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Yesterday the UK 10 year benchmark gilt yield fell to an all time low of 1.3%, slightly below the previous lowest ever level touched early last year. The 5 year gilt yield fell to 0.67% and the 2 year to 0.3% and even after some recovery in prices today the yield on both 5 and 10 year gilts has still fallen by nearly 40 basis points in the last month. Yields have fallen so fast that mortgage lenders are now well behind the curve with their fixed rate pricing, leaving scope for some significant rate cuts on fixed rates.

However, although this is good news in the short term for anyone wanting a new mortgage the rapidly increasing global problems remain a major concern. Whilst few, if any, market participants in 2007/8 had lived through the previous global banking crisis which started in 1929 and lasted several years, memories of the 2007/08 crash are still fresh.

When any major commodity price has large movements over a short space of time there will be casualties, sometimes not obvious ones. The collapse of the oil price is great news for consumers and few will shed tears for The Chancellor as he sees less VAT receipts from the lower fuel price. More worrying for the banks is the impact on the Balance Sheets of many companies operating in the oil and steel sectors, as well as some other commodities, which will have taken a big hit and it is very likely some loans to this sector will have to be written off. 

The ECB already charges banks 0.3% to deposit money with it and has sent strong signals it’s negative interest rate will go even more negative next month. The Swedish central bank yesterday cut its repo rate from minus 0.35% to minus 0.5% and said it may cut further and as more central banks introduce negative rates and many who have already introduced Quantitative Easing are maintaining that policy much longer than they expected when it was introduced, banks’ business models are being destroyed. In the UK the PRA and/or FCA has to approve banks’ business models but although the stress tests the regulator requires banks to pass include factoring in a large fall in property prices I doubt they include the impact on Balance Sheets of having to pay the central bank to hold deposits.

Negative interest rates are designed to encourage banks to lend money rather than keep it but in order to make banks safer regulators require banks to hold more liquidity. There is an obvious conflict here and one which both central banks and politicians seem unable or unwilling to resolve.

In 1933 Franklin D Roosevelt famously said "You have nothing to fear but fear itself” but banks’ single most critically important asset is confidence. Once lost it becomes increasing difficult to restore, and the time available to do so has become extremely limited in a world where both hard news and rumours spread like wildfire. When the market starts seriously worrying about the health of Germany’s largest bank (Deutsche Bank) and the share price of Switzerland’s second largest bank (Credit Suisse) hits a 27 year low, as it did yesterday, it would be foolish to ignore the risks to global financial stability. As we saw in 2007/08 banking problems in one country now rapidly infect the rest of the world and so although no UK banks appear to have the same problems as some of the weaker banks elsewhere in the EU one can’t ignore the contagion risk if a major bank elsewhere gets into serious difficulty.


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