Thursday, September 17, 2009

Another way of keeping prices artificially high

Fixed mortgage rates could fall soon

The cost of fixed rate mortgages could drop in the coming months due to the Bank of England's plans to pay banks less for their deposits. The Governor of the Bank of England, Mervyn King, said yesterday he is considering lowering the interest rate he pays to High Street banks on their deposits, a move aimed at encouraging banks to lend rather than hoard cash.

Posted by hotffot @ 10:33 AM (934 views)
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5 thoughts on “Another way of keeping prices artificially high

  • In my view this would be more likely to cause an increase in morgage rates as banks increase their margins to offset the costs charged by the BOE.

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  • mark wadsworth says:

    We know from bitter experience that they will stop at nothing, so this is quite likely.

    But wdbeast makes a good point.

    Another way of looking at this is why would banks borrow from depositors at (say) 2.5% if all they do is lend it to BoE at 0.5% or even 0%? Banks would be best advised, in the short term, to withdraw money from BoE and repay depositors (of course you can’t forcibly repay them, but you can pay lower interest or introduce monthly bank charges to get them to clear off) or bonds as they fall due (on which interest rates are much higher), rather than lending it out as mortgages.

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  • Obviously this order has come from that great incompetent Gordon Brown. Shame it probably won’t work.

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  • If you have £1000 which is earning you say 0.5% interest, but BoE is now going to reduce it to Zero, means that they have to lend it to somebody else to earn a return of some sort. Which is better, to earn nothing and hold on to £1000 or lend it and you may loose £1000 ie. loan turns sour. I know this is a very simple scenario. No doubt somebody out there can expand, perhaps [email protected]

    Any comments please or am I barking up the wrong tree.

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  • mark wadsworth says:

    @ House, the trouble with “the banks” is that “the banks” are an abstract concept. They were run by people who saw a good way of earning bonuses with no regard for the interests of the shareholders.

    But imagine you had £1,000 to spare – would you rather lend it to somebody to finance a mortgage earning 5% but with bad debt risk; put it on deposit with the BoE at 0.5%; or use it to repay your own borrowings on which you are paying 4%? There are pro’s and con’s to each course of action, but it is not rocket science and your guess is as good as “the banks” collective guess.

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