Why the UK economy is one of the most vulnerable right now

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There’s an economic idiosyncrasy in the UK that makes it “one of the most vulnerable countries in the world right now,” according to an investment strategist.

Mike Harris, founder of Cribstone Strategic Macro, argues that Britain is a major problem and that its mortgage market is an “increasingly short-term.” While long-tenure mortgages such as the US and other parts of Europe, many Brits opt for short-term loans of less than five years. Tracker mortgages are also popular with the fluctuate bank of England’s base rate.

Harris told CNBC Friday that this was an issue that would result in an immediate inflation of household incomes, while it may not be the case. He explained that the UK was a country that “imports inflation,” so that the interest rate hikes by the Bank of England were simply a rebalancing of supply and demand that would slow down consumer price growth.

“Here, we are not really looking at a pure situation where we are looking for a slow economy, we are trying to rebalance expectations, and the UK is a country that imports inflation … In a position where we are free to just focus on supply and demand, ”he said.

He added: “We are stuck in a situation where global inflation is driving our inflation. At this stage, we have to hit the consumer and instead of just asking for the propensity to spend, we are actually taking the money out of the household.” income, which does not happen in the US “

The Bank of England raised interest rates by a quarterly percentage point on Thursday, taking its base interest rate to 1%. That’s the highest interest rate since 2009 and was the BOE’s fourth hike in a row. The central bank also forecast that inflation would hit 10% this year, with soaring food and energy prices exacerbated by Russia’s unprovoked attack on Ukraine.

Harris said he had twice received the data from the Bank of England about how much the country was lending to a fixed two-year term and how much it had set for five years, but he said the central bank did not. information.

Harris argued that it was “absolutely the central bank for insurers who don’t have the economic impact associated with every rate hike.” He explained that consumer behavior would likely change a lot in five years but it would in two years.

UK ‘facing the music’

According to a data from trade association UK Finance, 1.5 million fixed-rate mortgage deals are due to expire in 2022, with another 1.5 million due next year.

In a data release on Friday, investment platform Hargreaves Lansdown calculated that someone was remortgaging a two-year fixed term deal following the latest interest rate hike, which could see their monthly payment go up by £ 61. If the base rate hit 1.5%, Hargreaves Lansdown worked out that could add £ 134 to their monthly mortgage payments. According to a survey of 2,000 UK adults, more than a third of people will have to pay for those extra costs.

Harris said that the current rate of raises “is in an environment where we are going to destroy more than we need to. [former governor] Mark Carney didn’t do their job as they should. ”

He said this was the dynamic of the Federal Reserve in 2007, just before the onset of the Global Financial Crisis, “when they were mortgages they knew when they could repay them if house prices fell.” to refinance so there’s an inherent unsustainability. “

Harris added that the UK was now a stage where it was “facing the music.”

“I would say that the UK is one of the most vulnerable countries in the world right now. The central bank governors didn’t do anything about it, they still have some time,” he said. If policymakers had the means to extend this debt duration now, they should be doing “actively”.

A spokesperson for the Bank of England declined to comment but pointed to CNBC’s recent statements by Governor Andrew Bailey and Chief Economist Huw Pill.

In the past, two-year fixed-term mortgages have been popular because they tend to be cheaper than the shorter lending period. However, UK Finance said that five-year agreements of popularity have been growing with 50% of fixed-term contracts in place in 2021, while 45% were on two-year contracts.

Bank of England data showed last week that the “effective” interest rate – the actual interest rate paid – increased 14 basis points to 1.73% in March – the largest increase since March 2016, according to Bloomberg.

Living squeeze of cost

Speaking on CNBC’s “Street Signs Europe” Friday, Bank of England chief economist Huw Pill also pointed out that the spike in inflation was driven by external shocks.

He said it was “uncomfortable” for central bank members to be forecasting a 10% rate of inflation, which is well above the bank’s long-term target of 2%.

“Of course that discomfort has to be seen in the context of the real impact of the cost of living squeeze on households and firms here in the UK, and it’s more painful for them than a policymaker’s point of view,” Pill added.

He explained that the Bank of England was trying to use a monetary policy to try and ensure that the drivers of inflation did not result in consistently high prices, and that a stagflationary environment was like that of the 1970s. But he said the central bank wanted to bring inflation back to the target without introducing “unnecessary volatility into the economy.”

Bank of England Governor Andrew Bailey told CNBC’s Geoff Cutmore Thursday that the UK was seeing an “unprecedented big shock in real income coming from this country overseas,” in terms of trade issues.

Bailey also defended the central bank’s more cautious approach to raising interest rates, with three dissenting members arguing that its MPC had argued that the BOE should be more aggressive with its hikes.

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