Saturday, May 14, 2011

Banks are furious that NS&I's inflation-busting bonds have returned because they 'can't compete'

This is money: Banks' anger at NS&I return is disgraceful

Can you ruddy believe it? The incredulity? The downright cheek?
Banks and building societies are up in arms about the return of NS&I's inflation-linked certificates because they 'just can't compete' with its promises.
They've been dreading this day ever since George Osborne gave the green light for National Savings & Investments – the Government's savings arm – to raise a net £2bn from savers during the 2011 to 2012 tax year.
Read more:
Thanks George that should reduce the net mortgage lending nicely until April next year gently pulling down prices.

Posted by khards @ 08:43 PM (3475 views)
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1. khards said...

This really was the best news of last week.

Unfortunately for me I just shoved my money into premium bonds.


I wanted to get my money out of the banking system for a few reasons:

1, So it could not be loan out on a fractional basis to BTL landlords.
2, Because the interest is not worth didly and I might get lucky on the Bonds.
3, Because I do not want the bankers gambling it on commodity's costing me money.
4, I do not want the bankers making money out of me.

Saturday, May 14, 2011 08:49PM Report Comment

2. Crunchy said...

1. khards

Your'e cooking on gas lately, but you forgot about an attempt also to kerb the price of gold and their fear that by increasing the money supply to a greater degree than already, (hush, hush.) inflation will be intolerable.

There comes a point in every central bankers mind that inflation is as much of a threat to house prices as the hiking of interest rates.

Saturday, May 14, 2011 08:58PM Report Comment

3. markj69 str05 said...

@ khards... I too have PB's, same reason as no.2 above. But where do you think your money actually goes to? I'm not sure, but if it's not re-invested somewhere, benefitting other financial institutions i'll be surprised.

Saturday, May 14, 2011 10:58PM Report Comment

4. Vox Populi said...

The secret for banks to compete fairly with NS&I:

Slash executive bonus & salaries by 90% to finance the high interest payment and to stay competitive

Saturday, May 14, 2011 11:08PM Report Comment

5. str 2007 said...

This bond is based on RPI + 0.5%. RPI according to the article is over 5% currently, which makes a nice tax free return. However if there is an HPC over the next 5 years (which I believe is registered with the RPI figure) the rates may not look so good.

Maybe that's one for MW or The Number Cruncher - what is the drag on Rpi for each 1% house prices fall?

Saturday, May 14, 2011 11:54PM Report Comment

6. novice pete said...

@str 2007

Maybe some insight here, I just don't know, I'm a novice.

Sunday, May 15, 2011 12:34AM Report Comment

7. taffee said...

david blanchflower on bloomberg this weekend still think we'll have deflation

Personally I totally agree

Sunday, May 15, 2011 08:50AM Report Comment

8. a saver said...

It was outrageous that these bonds were withdrawn because of the banks complaining -they've now come back offering only 0.5% above inflation, whereas they used to give you over 1%. And you can't get a 3-year term. Luckily I nabbed a couple of the older issues and am able to roll them over when they expire.
As far as the effects of an HPC on RPI are concerned, I'd be so thrilled at being able to buy a house at a sensible price (more precisely replace the house that I sold in 1999 while overseas) that I wouldn't worry about loss of interest on my inflation-linked bonds.

Sunday, May 15, 2011 09:14AM Report Comment

9. khards said...

@5. taffee

Yes there is deflation. Nominal wage deflation and there has been since around 2000

Sunday, May 15, 2011 09:32AM Report Comment

10. icarus said...

How badly will it hurt banks? According to the BoE there's over £1 trillion on deposit with 'financial corporations' and the NS&I issue will raise a max of £14 billion (1.4% of that total) and individuals are limited to £15k's worth of these bonds. Still, every little helps.

Sunday, May 15, 2011 10:37AM Report Comment

11. mark wadsworth said...

STR: "what is the drag on RPI for each 1% house prices fall?"

That's a very good question. NSO says 23.8% of RPI shopping basket is "housing" (up from 15.7% in 1987!). Somewhere towards the end of this pdf file it gives a very detailed breakdown of what's in housing (but without weights), the main headings are...
Mortgage Interest - Average interest payments (estimated/modelled)
Council Tax/rate
Water and Other Charges
Repairs and Maintenance Charges
DIY Materials

So mortgage interest is the only one which varies with house prices (let's guesstimate that it's half of total housing costs? So it's 8% of total basket?). Half of any variation in mortgage costs is to do with interest rates (despite what Flash says, there is some correlation between higher interest rates and lower prices). So house prices themselves are only 4% of RPI basket, and price falls do not affect the amount people pay in mortgage interest UNTIL people actually move. Further, the measure seems to be mortgage INTEREST, so as far as RPI is concerned, a 90% loan on a £100,000 house is the same as a 60% loan on a £150,000 house.

So let's assume all other prices in RPI basket stay the same, and even that interest rates stay exactly the same and house prices fall by ten per cent in a year. About one-in-twenty houses get bought and sold every year, so you might think that the new people take out ten per cent smaller mortgages, in which case total price of basket goes down by 8% x 10% x 1/20 = 0.04% (i.e. b-gger all, for these purposes).

Further, a fall in house prices may have no effect at all, if in Year Zero people are paying £20,000 deposits for a £100,000 house with £80,000 mortgage and in Year One, people are paying £10,000 deposits for the same house now worth £90,000 with an £80,000 mortgage.

To cut a long story, house prices have more or less no effect on RPI from year to year.
Interest rates have a much large effect, i.e. assume everything else stays the same and interest rates go from 4% to 6%, then tha 8% of RPI basket goes up from £8 to £12 and that's 4% inflation (in the first year of the rate hike, after that it has no effect).

Sunday, May 15, 2011 02:39PM Report Comment

12. str 2007 said...

Novice pete
Thanks for the link.

Thanks for the detailed analysis.
The NS&I seems an ok return given what you've said. I struggle to think 5 years ahead but maybe it appears to be a good place to keep a little cash.

Monday, May 16, 2011 10:02AM Report Comment

13. mken said...

As I understand the report on - Money Box cash can be withdrawn with only limited penalties after 1 year.

Monday, May 16, 2011 10:34AM Report Comment

14. mr g said...

No one has mentioned that you can withdraw your money effectively penalty free from these index linked bonds after holding them for one year, therefore if interest rates went to the moon (fat chance!!) you would still be able to take advantage by getting out of the NS & I product.

Monday, May 16, 2011 02:52PM Report Comment

15. mr g said...


Sorry, I hadn't read your post when I made my comment about withdrawing your cash penalty free after 1 year as I was so incensed by the banks whingeing.

Monday, May 16, 2011 02:55PM Report Comment

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