Interest rate minutes released

The minutes from April’s monetary policy committee show that the Bank of England’s policy makers are in favour of keeping rates at the all time record low of half a percent.

The vote was recorded as being 6 to 3 in favour of keeping the current rates and holding them for now. This is the third month in a row that the same three members have voted to raise interest rates. The committee has however maintained that their view on inflation had not changed and that rates will remain the same. It is not expected that the Bank of England will increase that interest rate until august due to the risk that inflation could rise to or exceed 5%.

Two of the committee members, Mr Dale and Mr Weale voted for a raise of 25 basis points to 0.75% and Mr Sentance voted for a raise of 50 basis points to 1%. This comes after Februarys fall in the consumer price index to 4% was combined with a rise to 5.4% of the producerprice index. Mr Posen however, voted to increase the asset purchase programme by £50bn bringing the quantitative easing to a total of £250bn

Filed under: Economy

New FSA powers unlikely to stop property collapse

The BBC reports that the FSA has implemented new poers to ensure that repossessions are now a matter of last resort for mortgage lenders:

Under the new rules for treatment of borrowers in arrears, the FSA is insisting that:

• firms must not apply a monthly charge where a repayment agreement for arrears is already in place
• any payments made by customers must be first allocated to clearing the missed monthly payments, rather than to arrears charges which can be repaid later
• repossessions should always be the last resort.

In addition, firms will be obliged to record all telephone calls with customers in arrears and keep them for three years.

However, these steps are unlikely to stop the flow of repossessions likely in the future.

What few commentators are speaking about at present is that we are continuing to live with record low interest rates, but that these will inevitably have to rise soon enough. The current mortgage standard of around 4% is likely to rise to around 7%-8% and this is when the pain will really start to hit.

Not only that, but we are likely to see the general economic slowdown and rising interest rates impact the property market, dragging it down, resulting in negative equity as a real sting for many consumers with a mortgage. We’ve already seen a report of house prices falling this week, and I would expect the issue to be compounded through this year.

Filed under: Economy, Property

Osbourne gives BoE full powers, but more is required

Last week one of the biggest financial stories was George Osbourne’s effective dismantling of the FSA and returning full supervisory powers to the Bank of England:

In his first Mansion House speech, Mr Osborne said he would abolish the current system of financial regulation.

The Financial Services Authority (FSA) will “cease to exist in its current form”, he told the City of London.

But he also revealed that Hector Sants, the chief executive of the FSA, would stay on to oversee the transition.

The chancellor added that Financial Secretary Mark Hoban would set out further details to parliament on Thursday.

The problem being, of course,as has been widely pointed out, no regulator across the world appears to have really seen the financial crisis coming, instead living in hope that while they made hay while the sun shined, that the sun would keep shining. The regulators were all fooled by complex inventment instruments, and so were the rating agencies, the sellers, and the buyers together. Only a few lone voices saw any real danger and they were ignored until too late.

The danger is that the change in regulatory structure is not simply too little too late, but that it will also cause restrictions on economic growth. If the Bank of England can now start to restrict mortgage lending, and lending to business, the resulting lack of credit in the economy can only constrain growth, and come at precisely the wrong time.

This is probably even more a salient point as Mervyn King has suggested that interest rates may have to rise sooner, rather than later. In which case, it can only create yet another additional pressure on credit in the economy. While too much credit has been proven to be a bad thing, too little credit is demonstratively counter-productive as well.

In the meantime, how effective can the Bank of England be with main regulatory powers under it’s main control, if no one in the decision-making process notices the real dangers anyway? And how likely is the Bank of England going to address existing economic imbalances, not least in the UK property market and its still extant bubble, after allowing it to develop for so long?

The real problem for many people is not regulatory supervision either, as unfortunately consumer-orientated needs are still being driven by smaller, daresay ineffective agencies. For example, the FSA will now become just Consumer Direct, an organisation that for all intents and purposes is simply a conduit for complaints, rather than a body that can truly address them in the first place. And then there are the other consumer bodies, weak and little effective, such as the Office of Fair Trading which has continued to give the green light to unscrupulous lenders, while the Ministry of Justice continues to licence debt claims management companies which have taken money from consumers for years, and yet never delivered a return for them.

There is a serious problem with regulation and supervision of the financial services industry being disjointed. While dismantling the FSA may seem like an initially helpful move, evidence suggests the real reform is required at the point where consumers meet service providers, and as yet, this area still remains disjointed and exposes consumers to unnecessary exploitation.

Filed under: Business, Economy

US job losses increase

It’s of no surprise to read the BBC news about job losses in the US increasing again.

One of the big problems already highlighted is that the unemployment figures relate only to those claiming unemployment benefit – and this is a temporary benefit.

While Barack Obama did increase the term to six months, it remains a problem that after these six months are over, the unemployed no longer appear in the US employment data.

I’ve long been expecting the US employment figures to go positive on this technical issue alone, so the December jump was hardly entirely surprising, as we were left looking at a more realistic picture of unemployment.

One thing is for sure – we’re going to see these figures undergo an ugly rise through 2010.

ADDED: Ambrose Evans covers the same picture in more detail here.

Filed under: Economy, unemployment

The fundamental change in savings

The way people save has undergone a fundamental shift, but not a lot of people have noticed the change.

Traditionally, savers would put their money away into a savings account, where the interest rate would be reasonably competitive, could vary from time to time, with higher rate accounts offering higher returns the less you touched your money (ie, notice accounts).

Those people with a lot of money to save would often look to save their money in multiple accounts with multiple savings providers, and those in the higher income bracket saving into an offshore bank account.

While there were additional savings options for tax-free interest, such as TESSA’s, PEP’s, then ISA’s, and variations on savings such as the premium bonds, that was as complicated as it got.

Those who did not want to invest in stocks and shares, mutual funds or index funds, futures, bonds, or other investment vehicles as part of a portfolio, remained just savers.

What has happened since the financial crisis impacted is now those savers have become investors, without realising it.

Savings rates have been slashed as the Bank of England dropped central banking rates through the floor to the record lows of 0.5% – with both current account and savings account rates following suit.

The result? Most current accounts now pay 0% interest, and savings accounts rarely offer more than 1.5% .

However, many savings providers are now offering higher rate savings through fixed rate bond accounts, where interest rates can be 4% or more above the Bank of England’s base rate, so long as you lock you money in to the account for two, three, or five years.

The result is a major change in the savings landscape that few have even noticed, as savers are now finding themselves forced into putting their money into bonds for a fixed term. In effect, they are now investing in investment products, rather than saving in savings products.

The surprise is that only a few savings and investment brokers have noticed this change.

While some commentators have suggested that 2009 saw the growth of green shoots in the economy, others remain adamant that we are looking at a W shaped recession.

Either way, it looks like the savings landscape is not going to change any time soon, and that fixed term plans will continue to force savers to become investors in all but name.

Filed under: Economy, Savings, Economy, investments, Savings, uk

How far will the UK economy fall?

The more I read about the impact of the financial crisis in the UK, the more it feels that the UK is doomed economically, and that the best option now while you have cash in Great British Sterling is to cash out and move aborad to somewhere more financially sound – ie, not threatened with collapse by the weight of its own debt.

That may seem somewhat alarmist, but despite the claims of “green shoots” earlier in the year, we have not seen any signs that the economy is returning to normal. In fact, anything but, and that at best we’re moving into a “lost decade” similar as to what happened to Japan.

Britain’s debt to GDP is spiralling out of control, and even measures to reduce costs being mooted by Labour and the Conservatives are plain in their limitations – we are in far too much of a hole to be able to dig us out even within the next Parliament. It’s going to take a full decade to even begin to expect to bring British debt to normality, and during this period, there is no reason to presume the economy will fare any better.

Repossessions continue to be high, insolvencies are expected to increase, and consumer debt is growing through credit cards and loans at a time when paying are supposedly paying off debt. Unemployment continues to increase in leaps and bounds (forget that’s its slowing – double dip, people), and rather than help employers hire, the government is actually going to tax companies more for employing people.

In the meantime, ratings agencies expect at least a further 15% fall in house prices in the UK, and at a time when the market is limping forward, the FSA wants to bring in tougher rules on mortgages, while at the same time demanding banks hoard more cash.

And that’s before we even get into the threats of deflation and unknown consequences of “Quantitive Easing”.

The result of all these pieces in play can hardly be good for Britain – worsening debt, worsening access to credit, worsening consumer spending, falling asset prices, etc. The strategies in play may be different to Japan in the 90′s, but the state of play is looking increasingly like it.

The problem, of course, is that while matters are exacerbated in the UK, these are afflictions across the world economy. So where is safe?

The answer is relative – the financial crisis is firmly rooted in the US and Europe, and while other areas have been impacted, their fundamantals have been far less knocked by comparison.

Asia remains strong and a bulwark so far against global financial collapse. While no doubt asset bubbles there are growing, they still don;t have the problem of being so invested in complex debt instruments that have so far crippled US and European banks.

In the meantime, now seems to be the moment to batten down the hatches or move on – economic power is clearly heading East, and to developing nations, and for those who remain, only the prophets of doom are left to comfort us.

Filed under: Economy, debt, finance, investment, property, safety, uk

Recession claims misguided

A lot of interesting stories coming up today, showing the continuing turmoil in the financial world.

First up, Edmund Conway claims the recession is over, which is about as optimistic as you can get.

Much of this unfounded optimism seems focused on the fact that the property market has seen a positive bounce over this spring – mortgage lending is up, buyer enquiries are up, and the DCLG reported a 1.1% rise in house prices over April.

The problem is, spring has always been prime home buying time, so to extrapolate this into some form of economic recovery seems absurd. It really does look like a bounce, which means we should expect economic conditions to get a lot worse towards the winter – as the property market traditionally cools.

In the meantime, other economic indicators are looking increasingly adverse.

We’ve seen repeated claims that the European banks have not properly written down their losses. In the meantime, Eastern Europe looks like it could crash and drag a lot of Europe down with it through a chain reaction. Latvia is already in big trouble and could be the smoking gun to bring the rest of Eastern Europe down with it, and a number of central European banks with them. And that’s before we address the issue of existing write-downs the ECB is already severely worried about.

In the meantime, here in the UK, the whole banking sector continues to reshuffle in order to try and adapt to what still remains a crisis.

RBS is looking to split off business deals it claims as “unprofitable” into a separate group – in the meantime, as if the market hadn’t already got itself into trouble creating complex debt instruments, this is exactly what is being proposed to get the UK taxpayer money back from semi-nationalised banks such as the RBS and Lloyds Group.

Among the building societies, the government is looking to allow changes to how they fund themselves in mass markets, in order to stop a repeat of the Dunfermline Building society crash. This is not least because others, not least the West Bromwich Building Society and others are also believed to be on the brink of collapse.

The Nationwide Building Society has already raised its mortgage rates sharply this week, close on the heels of other increases in mortgage rates last month. While the Nationwide remained one of the cheapest mortgage providers around, it no longer appears to be trying to outcompete other mortgage lenders.

If anything, the entire financial world still seems to be on a downward spiral. While the potential collapse of the banking sector appears to have been averted – certainly for now – the global economic picture is anything but healthy.

Stay tuned.

Filed under: Economy, Mortgages, Property, banks, building societies, Economy, house prices, uk

Nationwide changes mortgage rate – so what?

It’s unfair to see the recent criticism of the Nationwide Building Society’s changes to its mortgage rates.

Yes, it’s unfortunate that the Nationwide will no longer be putting new borrowers on it’s existing Base Mortgage Rate (BMR), currently at 2.5% – but let’s face it, the Nationwide has been pushing harder than any other mortgage lender to continue to provide mortgages to the market.

And no other mortgage lender was even coming close to beating Nationwide’s BMR.

Despite the fact that the Royal Bank of Scotland, Halifax, Bank of Scotlant, and Loyds TSB, all have direct government support through part-privatisation.

This is not least receiving government money with the aim of improving lending to to mortgage and loans market.

And yet RBS, HBOS, and Lloyds are still charging very uncompetitive rates, as if they are making a particular effort not to lend, and instead just hoard the government’s funding.

So it’s left to a mutual like the Nationwide Building Society to offer the cheapest mortgages, the cheapest loans, and even the lowest fees on credit card use.

And then when the Nationwide finally decides it needs to move new customers onto a new higher mortgage rate – one more comparative to rates offered by Barclays and HSBC, and still cheaper than RBS, HBOS or Lloyds, some journalists think this worthy of strong criticism?

Perhaps I’m biased – I used to be a financial advisor for a living so I like to think I can recognise a quality deal, and so far that is exactly what Nationwide have been delivering on – far more than any government-supported bank.

Nationwide have been leading the market in trying to allow responsible people to borrow responsibly.

If a small increase in rates on just one of their products for just new borrowers is deserving of such criticism, then I can only wonder why these journalists haven’t been more condemning of the lousy rates being offered by traditional high street banks.

Filed under: Economy, Property, banks, Economy, loans, mortgages, nationwide building society, uk

Frustrated with banks and savings

The Royal Bank of Scotland just announced a staggering £28 billion loss.

While we’ve seen a number of banks declare billions in losses over the past year, and the process still continues, the RBS loss is going down as the biggest corporate loss in UK history.

It’s unbelievable what’s happened to the banks, and what’s even more unfair is that it’s the tax payer who is paying for all the mistakes of the banks.

We’re not just paying in terms of government funding and asset swaps with the Treasury, but also as customers. Interest rates on savings accounts are dead, but mortgage and loan interest rates remain a lot higher than the Bank of England’s base rate.

Which means the banks are doing what they can to widen profit margins to recapitalise themselves, meaning that we’re ending up paying twice to save them from their own greed.

I currently have a Nationwide bank account which is paying less than 1% interest. On the one hand, at least I know Nationwide is one of the stronger financial institutions and isn’t under any threat of being part-nationalised like RBS and Lloyds, and doesn’t look likely to be nationalised any time soon.

Even still, as I’m saving for a deposit on a house, I don’t like the fact that my savings are no longer working as hard as they used to.

Hopefully the banking crisis will soon be over, and perhaps for the sake of the financial system, banks need to widen profit margins in order to bring this to an end sooner, rather than later.

But just don’t expect me to enjoy being part of the bail-out, when all I can see is the cost from it all, rather than the benefits.

Filed under: Economy

The BoE rate cut is wrong

This week’s move by the Bank of England to cut the interest rate to an all time low of 1% is a bad move for all of us, especially those trying to save money.

It is an unfortunate double whammy, because while the tax payer is subsidising the banking system via RBS and Lloyds especially though part nationalisation, plus through government guarantees and debt swaps with its special liquidity scheme, the cut in interest rates especially benefits the banks by increasing their profit margins.

A major way banks make their profit is through arbitrage between savings rates on loan rates. In other words, the bank offers a relatively low interest rate to savers, a relatively higher rate to borrowers, and the difference in between is profit.

The problem is that while savings rates have come down a lot, especially as the Bank of England cuts interest rates, the actual borrowing rates remain comparatively high.

For example, with mortgages, it used to be the case that tracker rates would follow the Bank of England’s rate up and down. If they still did this, then many people would be feeling the benefits.

However, lenders have now instituted a “mortgage tracker rate” which means the tracker rate they offer is a few full percentiles about the Bank of England’s interest rate, but does not necessarily comes down if the Bank of England’s interest rate is cut.

Many previous tracker mortgages also came with a mortgage floor which effectively means that the tracker mortgage will not come down below a certain rate, even if the Bank of England interest rate continues to fall.

Coupling the constant cutting of interest rates on savings, with the artificially high mortgage repayment rates, means that the UK’s banks are cashing in at the detriment to the very consumer’s whose taxes are keeping such banks afloat.

We as a nation are therefore hit by a double whammy of subsidising the UK banks directly through billions in government support, and additionally by the banks ensuring that interest rate cuts actually boost their own profit margins.

Not many people are aware of just how depressingly manipulated we are being used to help support the very institutions, whose greed and maladministration brought us into what appears to be a deep recession, and yet it will be the banks who end up profiting most from it.

Filed under: Economy