What a strange world we are living in presently. In the past, where inflation has taken hold, half a percent – increase or decrease – was considered de minimis in the scheme of things and hardly worth a mention. Today, it is heralded and chronicled as the biggest jump in 27 years.
In strict arithmetical terms, I suppose, it does represent a 40% increase in the previous interest rate level of 1.25% and it illustrates how relatively small increases on low figures, can be seen as a significant rise.
It will inevitably galvanise consumers to switch from variable mortgages to fixed rate ones, to try and avoid financial asphyxia.
More cranking of the interest rate lever needed
With a prevailing interest rate predicted to peak at 13.3%, in October, methinks that Andrew Bailey and his Merry Men are going to have to do a fair bit more cranking of the interest rate lever, if they are going to make even a dent on the inflation rate.
We all know that the inflation rate is a lagging indicator and even though a significant part of its stimulus is derived from the spiraling energy costs and commodity prices, taming the consumer demand is still a necessary part of economic prudence, even if the present circumstances are different to those of the past.
In Thatcher’s era, M4 (an important measure of the money supply) went up exponentially, as consumers went on a buying spree and borrowed themselves up-to-the-hilt. Interest rate rises were, in these circumstances, very effective in bringing this down, but this is not the case today.
Deal needed to reduce OPEC oil price
Let us hope that Grandpa Joe has managed to cobble together a deal with MBS of Saudi Arabia to reduce the OPEC price of oil, by using their substantial reserves, and with the revival of offshore drilling, fracking, the Keystone pipeline and aging nuclear power stations, all this in combination, will serve to bring down energy costs, even though the war in Ukraine may linger on.
Joe Biden, driven by ecological pressure groups, single-handedly reduced the supply of energy in the USA, which exacerbated the perfect storm when Putin started to play ‘silly buggers’ with his gas and oil supplies to unfriendly nations.
There is talk amongst the cognoscenti in the US corridors of financial power, that the inflation rate will come down significantly next year and this would be a very welcome fillip to the markets and to all the western economies.
Clearly a fudged compromise deal in Ukraine would have a positive effect, but this is very unpredictable and if we are relying on the despot in the Kremlin, for rationality, we are certainly ‘clutching at straws.’
The lifting the multiple earnings – a sensible measure?
As for lifting the multiple of earnings to qualify for a mortgage in the UK, I hope this, in hindsight, will be seen as a sensible measure. In truth, 20 odd years ago, when the multiple of earnings to borrowings was circa 3, this was predicated on the assumption that there was one money earner in each household. Given the emancipation of women’s earning capacity to approach that of men, even a multiple of 8 in today’s times, is the equivalent of the historic 4 times earnings, which was seen to be reasonably prudent.
I still believe that if you have secure employment and you can organise a fixed interest mortgage, it makes good sense to stretch yourself to buy the most affordable residential property that is prudent, since it is the best hedge against inflation.
Lest we forget, as inflation increases, debt shrinks in relation to equity, which is no bad thing.