Just what we didn't need - the return of rising mortgage rates
Government hopes of falling inflation and a consequent return by the end of the year to real terms income growth are being threatened by a potent combination of rising oil prices and increased mortgage costs.
For those with a typical SVR loan, repayments will increase by £16.40 a month. It doesn't sound much, but the bigger the loan, the bigger the impact and for those already struggling, it will surely be enough to tip them over the edge.
And for all those affected, it is a further ratcheting up in the cost of unavoidable necessities, leaving even less for discretionary spending at a time when household incomes are already being severely squeezed.
Aggregated across the country as a whole, the macro-economic impact is also sizeable. The numbers on SVR mortgages have been growing rapidly in recent years, as mortgage holders take advantage of today's ultra-low interest rates to refinance from more expensive, older deals. SVR mortgages are also the default option for more distressed borrowers who find difficulty in re-mortgaging. In the past year alone, SVR mortgages have risen from 48pc of Halifax's loan portfolio to 56pc
According to the economic consultancy Fathom, a rise of 50 basis points across all mortgages would knock around 0.6pc off overall disposable income and therefore household consumption.
The bottom line is that for the first time since the crisis began more than three years ago, mortgage rates are on the rise, and for many it will quite badly damage their pockets
. One of the main factors supporting demand through the crisis – ultra-low mortgage costs – is being partially removed.
it is in the nature of banking that once the market leader acts, everyone else finds some way of squeezing up prices, too.
The other big re-emerging negative is the rising oil price, which at one and the same time is both inflationary, by adding to costs, and deflationary, by reducing the amount that can be spent on other things.
No one really knows at what level a rising oil price begins to do significant damage, but we do know that virtually all serious recessions are preceded by an oil price spike. With oil back above $120 a barrel, we are back in the danger zone.
With devaluation, the terms of trade have moved badly against the UK, so for us, it may be rather lower. In sterling terms, the oil price is at record levels. Any major supply side shock, already to some extent anticipated in the price as a result of Israel's sabre rattling over Iran, would be a game changer.
In any event, the rising oil price is beginning to eclipse the eurozone debt crisis as the major concern for economic policymakers.
For the Bank of England's Monetary Policy Committee, which has been meeting this week, the policy choice just gets harder and harder. Just as things finally seemed to be moving in the Old Lady's direction, with inflation abating, along come rising oil and mortgage costs both to add to prices and to lower growth prospects.
For some years now, the Bank of England has consistently underestimated inflation and overestimated growth. The discomfort of this position may be more persistent than the Bank had hoped.
It was a big call for the Bank to ignore the inflation target in pursuit of demand and jobs. So far, the Bank has got away with it; Britain's inflationary adjustment is widely thought preferable to the deflationary one forced on the eurozone periphery. But there must be limits, and patience will have been tested to breaking point if, come the end of the year, living standards are still be squeezed by higher than expected inflation.
This post has been edited by Shotoflight: 07 March 2012 - 08:50 PM