Introduction: UK interest rates will remain high for years, Mark Carney warns
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
UK borrowers, from mortgage-payers to the government itself, will face high interest rates for years to come, a former Bank of England governor has predicted.
Mark Carney, who ran the BoE from 2013 to 2020, has warned that “big tectonic shifts in the global economy” mean the cost of borrowing – which has jumped over the last 18 months – will remain high for a while.
Carney told ITV’s Peston show last night:
One of the things that governments in the UK, and Canada, elsewhere have to get used to, now, is that they are going to be paying higher rates of interest for their debt for the foreseeable future.
Not just measured in 12 months, 24 months, but actually, the big techtonic shifts in the global economy mean that we are likely to have higher longer-term interest rates for a period.
And if governments face higher long-term borrowing costs, it’s a “good working assumption” that everyone else will too, Carney agrees.
He says borrowers should recognise this:
If you have still a few years of low interest rates on your mortgage, if you fixed just at the right time as it turned out, recognise that there will be ann adjustment over the medium term.
It’s a question of degree but the direction is very clear.
“They are going to be paying higher rates of interest for their debt for the foreseeable future”
Former Bank of England Governor @MarkJCarney warns that the government and consumers should brace for interest rates to remain high for years to come#Peston pic.twitter.com/HwqS78W9kj
— Peston (@itvpeston) June 14, 2023
The Bank of England is widely expected to raise interest rates again at its next policy meeting, next week. It has already raised interest rates 12 times in a row, to 4.5%, the highest since 2008.
This morning, the money markets are predicting interest rates could be near 5.75% by the end of this year.
Yesterday, chancellor Jeremy Hunt warned the UK has “no alternative” but to raise interest rates to bring down inflation, which was 8.7% in April.
Carney’s comments come as UK mortgage lenders continue to lift the cost of their deals.
Yesterday, HSBC announced that it would be raising the pricing on a swath of its residential and buy-to-let fixed deals from today, just days after temporarily pulled down the shutters due to a surge in demand.
Other lenders increasing rates included Coventry Building Society’s broker arm, which said it would be launching new, more expensive deals on Friday.
On Monday, Santander became the latest big bank to temporarily pull its mortgage deals for new borrowers from sale, and the following day, NatWest put up the rates on some of its deals by as much as 1.57 percentage points.
Also coming up today
Inflation is a problem beyond the UK, of course. In the eurozone, consumer prices rose by 6.1% in the year to May, which is likely to prompt the European Central Bank to hike its key interest rates today.
We’ll hear from ECB presidennt Christine Lagarde later today.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says:
The ECB is broadly expected to hike the interest rates by 25bp when it meets today, and ECB chief Lagarde will likely sound hawkish at the press conference following the decision and insist that despite the recent easing in inflationary pressures – and perhaps the deteriorating economic outlook, the ECB will continue its efforts to fight.
Last night the US Federal Reserve left interest rates on hold, pausing after 10 increases in a row. But Fed chair Jerome Powell was clear that the US central bank plans to keep squeezing inflation out of the economy (it fell to 4% last month).
In a sign that US interest rates will head higher, Powell said:
“Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2% over time.”
The agenda
-
9.30am BST: Latest UK realtime economic activity and business insights
-
10am BST: Eurozone trade balance for April
-
1.15pm BST: European Central Bank interest rate decision
-
1.30pm BST: US retail sales for May
-
1.45pm BST: European Central Bank press conference
Key events
Here’s the i’s housing correspondent, Vicky Spratt, on the mortgage rates crisis:
How this mortgage rates crisis differs to the 80s
???? Historically high house prices. Wages are up 94% since 2000 but house prices are up 224%
???? Today, average loan today is 4-5 x buyer’s income. In the 80s it was 2x
???? Britain has the highest headline inflation rate in Europe
— Vicky Spratt (@Victoria_Spratt) June 15, 2023
The money markets are currently indicating that UK interest rates will have hit 5.75% by February 2024, up from 4.5% today.
Laith Khalaf, head of investment analysis at AJ Bell, says it won’t take much to lift expectations to 6% (levels last seen in early 2001).
Khalaf explains:
“The Bank of England is caught between a rock and a hard place, as it has to choose between pushing more mortgage borrowers towards the brink and letting inflation run riot.
The latest readings for core inflation and wage growth have come in hot, and that has spooked the market, sending gilt yields skywards and raising expectations of more interest rate hikes to come.
The market is now firmly pricing in an interest rate rise at the MPC’s June meeting, and then four further hikes, taking us to 5.75%. A few hawkish comments from the Bank of England, or some more ugly inflation data, could easily tip those expectations up to 6%.
While interest rates may not ultimately hit those heights, those expectations do set market pricing in the here and now for government bonds, cash accounts and mortgages.
The head of NatWest Bank has warned that high borrowing costs, and the cost of living squeeze, is hurting poorer households, PA Media reports.
Dame Alison Rose told the Goldman Sachs European financials conference in Paris that lower income households are “really struggling with high inflation and high interest rates”.
“Typically these are not significant borrowers with us,”
“We’re putting a lot of proactive help and support out to customers.”
The group is also “monitoring it very closely”, she added.
Rose also said that NatWest customers were showing resilience despite wider economic uncertainty, saying:
“We’re not seeing any material signs of distress.”
Sarah Butler
Mike Ashley’s Frasers Group has upped its stake in Asos by just under a million more shares taking his stake to 10.6%, my colleague Sarah Butler reports.
That places Ashley in a position where he could block the automatic takeover of his shares by any bidder for the troubled online fashion retailer.
Buying into the company got more expensive today – shares have risen 14% after the group revealed it had returned to profitability in the latest trading quarter despite an on-going slide in sales.
The last tranche of 865,000 shares cost Frasers about £2.8m when they were bought on 12 June – today they would cost more than £3.2m.
So far Ashley is making money on his latest foray into stock picking…. it remains to be seen what time of long-term return on investment he will see and that may depend on whether the company attracts a bid from Frasers or anyone else and how its biggest shareholder Anders Povlsen reacts.
The UK housing market is “a metaphor for confidence in the UK economy – and its looking wobbly,” warns Bill Blain, market strategist at Shard Capital.
Blain warns that there would be ‘immense’ economic consequences if higher interest rates cause a collapse in house prices.
Young couples, for example, who have stretched to afford a house. could be “financially ruined” as mortgage rates effectively triple from 2% to 6%, Blain warns, adding:
To avoid a fundamental collapse in UK housing based on the unaffordability of homes, falling real incomes, and leverage (high mortgage repayments) we need to engineer a soft landing. The obvious way would be to encourage more house building, raise real wages so they become affordable – but that would mean an element of inflation, which would actually smooth the process.The alternative is rising unaffordability, the perception only the rich can afford homes, angry renters and an element of political populism leading to chaotic polices like nationalisation of rental property, rent controls and such. That way lies madness.
Perhaps the greatest thing that could help avoid a property-linked economic crash landing is a fundamental reappraisal of policy – and understanding that high levels of “sustainable” debt is ok to fund the nation if accompanied by sound spending policies. That is not meant to sound a bit Liz Truss: cut taxes, increase borrowings, nonsense. It could be done with a bit of thinking and imagination – a massive programme of social housing building where jobs are, lower home prices for those on the ladder and looking to step on, sorting out planning, and letting wages edge higher to sustain current private housing prices – avoiding the catastrophic consequences a collapse would have on national confidence.
Interesting to see what happens – the solution involves an element of inflation, but if housing does collapse the consequences on the economic confidence of the UK will be immense.
Wholesale gas prices are rising today, as the hot weather lifts demand for air conditioning.
The month-ahead cost of UK gas has jumped over 11% this morning to 106p per therm, meaning it has almost doubled since the start of June.
European wholesale gas prices have also jumped over 10% to €43 per Megawatt hour.
Last August, they spiked to €300/MWh as European countries scrambled to fill gas reserves ahead of last winter.
But they then fell back, and in May hit a two-year low.
European gas prices have shot up over the past week, and are up another 10% today. Apparently related to high temperatures increasing demand for cooling. I think this will be a relatively short-lived rally.
1/2 pic.twitter.com/GDM8aRWv83
— Benedict Barclay (@BarclayBenedict) June 15, 2023
Supply is still plentiful, and wind/solar are eating into demand. Europe has also had more rain than last year, so hydro generation should be higher.
But French nuclear power generation is still showing no signs of recovery. Anyone have more info on that? pic.twitter.com/Ty8slEwm9s
— Benedict Barclay (@BarclayBenedict) June 15, 2023
Record number of renters seeking help with no-fault evictions
Robert Booth
A record number of renters need help with no-fault evictions, suggesting landlords may be pushing cases through before the practice is banned in England under new legislation.
Citizens Advice said last month it helped almost 2,000 people with section 21 evictions, the most in a single month on record and a 25% increase since May 2022.
The practice will be prohibited in the renters’ reform bill, tabled last month by Michael Gove, the secretary of state for levelling up, housing and communities, affecting 11 million private renters.
The National Residential Landlords Association also said record numbers of landlords are selling up as mortgage interest rates keep rising. “The main reason landlords are seeking possession of properties is that it is no longer viable to continue letting,” said Ben Beadle, chief executive of the lobby group.
Landlords look to inc revenues or sell up before section 21 is abolished – “Citizens Advice said last month it helped almost 2,000 people with section 21 evictions, the most in a single month on record and a 25% inc since May 2022” https://t.co/cvLrexbzBb
— Emma Fildes (@emmafildes) June 15, 2023
Consumer spending in the UK weakened last week, according to the latest realtime economic data from the Office for National Statistics.
Debit card spending fell by 8 percentage points last week, data from Revolut shows, while overall retail footfall was 95% of the level of the previous week.
However, transactions at many Pret A Manger outlets increased; in London, sales rose by 21 percentage points after the end of half-term holidays across parts of the UK.
British pub chain Fuller Smith & Turner has estimated that it lost over £5m of sales due to strike action in the last year.
Fullers told shareholders this morning:
The train and tube strikes were particularly detrimental in Central London, where a significant proportion of our estate is situated, with commuters choosing to work from home.
Over the year to 1 April, revenues grew to £336.6m from £253.8m, despite the impact of strike action. Like-for-like sales in Central London grew by 40.1%, as demand bounced back after pandemic restrictions.
But pre-tax profits dropped to £10.3m from £11.5m, with Fullers also hit by high inflation in energy, food and wages.
Julia Kollewe
UK businesses have improved female representation on their boards, research shows, but two-fifths of FTSE 100 firms still do not have a woman in one of their top four executive roles.
The proportion of women on the boards of the 585 FTSE all-share listed companies has risen over the past year from 36% to 40%, according to the analysis of Companies House data.
However, the number of female bosses has flatlined, with just a tenth of executive roles occupied by women, excluding company secretaries. On a more positive note, the number of firms with all-male boards has halved to just four.
Last night, the Bank of England announced a review into how it makes and uses economic forecasts, following heavy criticism of its efforts to predict and control inflation this year.
David Roberts, the Chair of Court at the BoE, told the House of Commons Treasury committee that a broad external review of its “forecasting and related processes during times of significant uncertainty” had been commissioned.
Jumana Saleheen, Vanguard’s chief economist in Europe, says the Bank’s use of market expectations of interest rate moves in its forecasts are one problem:
Dependence of Bank of England forecasts on market interest rates create an unhelpful circulatory
– forecasts are conditioned on market expectations of future rates
– but market expectations of future rates depends on where the economy is heading— Jumana Saleheen (@JumanaSaleheen) June 15, 2023
Homeowners ‘turn their backs on the Tories’ as mortgage rates rise
Homeowners are turning their backs on the Tories as high interest rates increase the costs of their mortgages, exclusive polling for the i newspaper shows.
Strategy firm Stonehaven reports that Labour holds a 15-point lead over the Conservatives amongst homeowners, who are traditionally seen as Tory supporters.
The survey of more than 2,000 households at the end of May showed that 44% of mortgage holders say they would vote Labour if a general election were held tomorrow – an increase from 33% at the 2019 vote.
Just 29% of mortgage holders back the Tories, down from 44% at the last general election. The figures were calculated after the “don’t knows” were taken out.
Mark McInnes, insights adviser at Stonehaven, says:
“No party has won a general election in the last 50 years without winning mortgage holders”.
Homeowners turn their backs on the Tories, poll shows – piling new pressure on Sunak – inews https://t.co/Pcan3PypLu
— Gavin Woroniuk ???????? ???????? ????️???? ???? (@GavinWoroniuk) June 15, 2023
Hunt advisor: Important to keep raising interest rates
A member of Jeremy Hunt’s Economic Advisory Council has declared that interest rates need to keep rising to fight inflation, despite the unpleasant side effects.
Sushil Wadhwani, a former member of the Bank of England’s monetary policy committee, told the Today programme that failing to fight infation now risks making the situation worse.
Wadhwani says:
Inflation ultimely is the enemy of growth. It’s very important for us to get inflation down if you want sustainable growth
In that sense it’s important to continue administering the medicine, in the form of higher interest rates, not withstanding the side-effects, because if we delay raising rates then we might find the disease gets worse and we might then find that we have to do even more and experience even worse side effects.
Wadhwani adds that there have been “significant upside surprises” in both price and wage inflation in the last few months, “and it is increasingly looking like inflation is embedded”.
Having said that, it’s very important that no-one overreacts and no-one panics here, because there is a lot of tightening in the system. Mortgage rates are yet to go up for many people.
Wadhwani advises the MPC to “proceed judiciously” by raising interest rates by a quarter of one percent next week, from 4.5% to 4.75%, and resist the “siren calls” for a half-point hike.
Q: But raising interest rates higher risks killing the patient, not healing it. And the cost of government borrowing is higher than in the Liz Truss era….
Wadhwani also suggests that mortgage rates would be even more painful if the UK had stuck with Liz Truss’s economic policies, which were blamed for driving up borrowing costs last autumn.
Two-year mortgage rates could be closer to 8% than 6% today, he suggests, adding:
We would be in a much much worse situation had we allowed her to continue to attack the independent economic institutions.
China cuts medium-term lending rates as economy sputters
Over in China, the central bank has its medium-term borrowing costs for the first time in 10 months, as it tried to protect its economy from a downturn.
The People’s Bank of China lowered the rate on one-year medium-term lending facility (MLF) loans, by 10 basis points to 2.65% from 2.75% previously.
The move came after new economic data showed retail sales and industrial production growth slowed last month, suggesing the post-Covid recovery was stalling.
Alex Lawson
In the energy sector, National Grid has held talks with Drax over bringing two coal-fired units at its vast power plant in North Yorkshire out of retirement to prevent power cuts this winter.
The grid’s electricity system operator (ESO) has discussed possibly restarting the two units, which were shut this year after 50 years of coal-fired power generation at the Selby site.
Drax has converted four of the plant’s six units from biomass to coal in recent years and the final two units were kept available at the request of National Grid between October and March.
Drax began decommissioning the units in April but the ESO said on Thursday that talks to keep them available for the winter were “ongoing”.
ESO corporate affairs director, Jake Rigg, said:
“We are still in negotiations and we are working with Drax and with government.”
However, sources close to Drax said employees on the sites had already retired and work had begun on shutting down the units, meaning a restart was “very unlikely, although not impossible”.
In its early view of winter conditions, the ESO forecast that electricity supply would outstrip demand this winter, with a forecast buffer of 4.8GW of power.
The steep rise in mortgage interest payments as home-owners have to refinance their fixed rate deals is likely to cause a deep cut in spending power. Markets are now expecting that base rates will peak closer to 6% than 5% in the UK.#recession #mortgages #ukeconomy pic.twitter.com/PSXE8H8UBr
— Tutor2u Geoff (FRSA) (@tutor2uGeoff) June 15, 2023
Susannah Streeter, head of money and markets at Hargreaves Lansdown, agrees that the Bank of England is likely to keep hiking interest rates in the months ahead.
And even once borrowing costs peak, they are unlikely to fall quickly, she warns:
At the point when the Bank of England chooses to press pause, immediate cuts in interest rates aren’t expected. Inflation is still likely to be a threat, partly because of the ongoing fight for talent across the labour market.
Brexit is considered to have made this more acute, particularly for certain industries, such as healthcare. This has had a knock-on effect on another problem facing the economy – the high numbers of long-term sick, given that a lack of staff is likely to mean longer waits for treatment.
With so many people too sick to work, jobs market tightness is expected to remain.”
There were 1,051,000 million job vacancies on average across March to May 2023.
This was down 79,000 on the previous 3 months, with employers still saying economic pressures are holding back recruitment.
➡️ https://t.co/qcPaqHO7vL pic.twitter.com/eHVqt1YPIj
— Office for National Statistics (ONS) (@ONS) June 13, 2023
Homeowners warned to expect more pain with mortgage costs at highest in decades
Although UK interest rates have risen from .1% to 4.5% in the last 18 months, they are still well below the levels seen in the 1990s housing crash (Bank rate was around 14% in 1990).
But, as Ed Conway of Sky News explains, borrowers are already facing a big mortgage squeeze (once you adjust for the size of mortgages, and people’s disposable income as a propoortion of those payments).
This means that mortgage payers taking out new loans today are now facing the biggest home loan squeeze since the early 1990s housing crash, and the pain is set to worsen in the coming months, Ed adds:
????Blimey
UK money markets now pricing in @bankofengland interest rates of 5.75% by early next year.
That’s a massive change from only a month ago, when they thought rates might peak under 5%.
Things looking increasingly grisly for mortgage payers/the housing market pic.twitter.com/7S9OCon9uu— Ed Conway (@EdConwaySky) June 14, 2023
Let me show you why this is such a big deal. And it IS a big deal.
Right now, the average two year fixed rate deal is 5.9% acc to Moneyfacts. The avg 5yr deal is 5.54%.
Let’s be conservative and take the lower rate, and compare it to history…
Highest since 2008 pic.twitter.com/NzPve5DrTt— Ed Conway (@EdConwaySky) June 14, 2023
But now let’s adjust for the fact that these days people have bigger mortgages and lower incomes vs their monthly payments. @resi_analyst has done the sums on this. It results in a line like this.
This is a genuinely comparable measure of the burden of mortgage repayments pic.twitter.com/GDbLKr2n9P— Ed Conway (@EdConwaySky) June 14, 2023
Not pretty.
Right now, based on rates currently available, those refixing or taking out new loans are entering the biggest mortgage squeeze since 1991.
This is not a projection. It’s happening RIGHT NOW.
NB the ’91 mortgage squeeze contributed to a mammoth housing crash/recession pic.twitter.com/mktnI8rxfa— Ed Conway (@EdConwaySky) June 14, 2023
But the problem is, today’s available rates ????don’t yet reflect the ever increasing expectations for the official @bankofengland rate. Which is expected to rise a further percentage point! Eg quite a lot! So actual MORTGAGE rates are almost certainly going to go even higher… pic.twitter.com/yR16bccNhQ
— Ed Conway (@EdConwaySky) June 14, 2023
It’s not totally implausible that the squeeze for those with mortgages could actually be WORSE than in the 1990s.
Btw if at this stage you’re still scratching your head and thinking: “how can it be worse NOW (with 5-6% rates) when 1980s mortgage rates were in double digits…?” ???? https://t.co/zaIhLY5xHI— Ed Conway (@EdConwaySky) June 14, 2023
Key words in last tweet: “for those with mortgages”.
For there are also record numbers of people these days who have paid off their mortgages. While they are facing a cost of living squeeze like everyone else they’re also BENEFITING from rising interest rates on savings/annuities— Ed Conway (@EdConwaySky) June 14, 2023
Introduction: UK interest rates will remain high for years, Mark Carney warns
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
UK borrowers, from mortgage-payers to the government itself, will face high interest rates for years to come, a former Bank of England governor has predicted.
Mark Carney, who ran the BoE from 2013 to 2020, has warned that “big tectonic shifts in the global economy” mean the cost of borrowing – which has jumped over the last 18 months – will remain high for a while.
Carney told ITV’s Peston show last night:
One of the things that governments in the UK, and Canada, elsewhere have to get used to, now, is that they are going to be paying higher rates of interest for their debt for the foreseeable future.
Not just measured in 12 months, 24 months, but actually, the big techtonic shifts in the global economy mean that we are likely to have higher longer-term interest rates for a period.
And if governments face higher long-term borrowing costs, it’s a “good working assumption” that everyone else will too, Carney agrees.
He says borrowers should recognise this:
If you have still a few years of low interest rates on your mortgage, if you fixed just at the right time as it turned out, recognise that there will be ann adjustment over the medium term.
It’s a question of degree but the direction is very clear.
“They are going to be paying higher rates of interest for their debt for the foreseeable future”
Former Bank of England Governor @MarkJCarney warns that the government and consumers should brace for interest rates to remain high for years to come#Peston pic.twitter.com/HwqS78W9kj
— Peston (@itvpeston) June 14, 2023
The Bank of England is widely expected to raise interest rates again at its next policy meeting, next week. It has already raised interest rates 12 times in a row, to 4.5%, the highest since 2008.
This morning, the money markets are predicting interest rates could be near 5.75% by the end of this year.
Yesterday, chancellor Jeremy Hunt warned the UK has “no alternative” but to raise interest rates to bring down inflation, which was 8.7% in April.
Carney’s comments come as UK mortgage lenders continue to lift the cost of their deals.
Yesterday, HSBC announced that it would be raising the pricing on a swath of its residential and buy-to-let fixed deals from today, just days after temporarily pulled down the shutters due to a surge in demand.
Other lenders increasing rates included Coventry Building Society’s broker arm, which said it would be launching new, more expensive deals on Friday.
On Monday, Santander became the latest big bank to temporarily pull its mortgage deals for new borrowers from sale, and the following day, NatWest put up the rates on some of its deals by as much as 1.57 percentage points.
Also coming up today
Inflation is a problem beyond the UK, of course. In the eurozone, consumer prices rose by 6.1% in the year to May, which is likely to prompt the European Central Bank to hike its key interest rates today.
We’ll hear from ECB presidennt Christine Lagarde later today.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says:
The ECB is broadly expected to hike the interest rates by 25bp when it meets today, and ECB chief Lagarde will likely sound hawkish at the press conference following the decision and insist that despite the recent easing in inflationary pressures – and perhaps the deteriorating economic outlook, the ECB will continue its efforts to fight.
Last night the US Federal Reserve left interest rates on hold, pausing after 10 increases in a row. But Fed chair Jerome Powell was clear that the US central bank plans to keep squeezing inflation out of the economy (it fell to 4% last month).
In a sign that US interest rates will head higher, Powell said:
“Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2% over time.”
The agenda
-
9.30am BST: Latest UK realtime economic activity and business insights
-
10am BST: Eurozone trade balance for April
-
1.15pm BST: European Central Bank interest rate decision
-
1.30pm BST: US retail sales for May
-
1.45pm BST: European Central Bank press conference
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