In the last four years the Bank of England has kept UK interest rates at an all time low of 0.5% and pumped a staggering £375bn into the economy. As a result savers have lost out and companies have been forced to top up pension funds rather than using spare cash for growth investment. The banks quantitative easing policies have been
described as a “monumental mistake” and are being pressured by Thread-needle Street to increase interest rates.
Restless economists are calling for more action from the UK central bank. In response, the new governor, Mark Carney declared the bank´s policy options are far from exhausted and suggested he would take aggressive action to ensure “escape velocity,” in order to avoid a triple-dip recession. Speaking at the World Economic Forum this
week, Carney said, “There remains considerable flexibility – which includes the use of communications, which includes the use of unconventional measures.”
Can Carney save UK economy?
Carney was handpicked for the role as Governor of the Bank of England by George Osborne. His reputation soared after he managed to avoid the global crash that gripped the world during his tenure as the governor of the bank of Canada. He has now been handed the task of reviving the UK economy and overturn the mess his predecessor Sir
Mervin King appears to have left behind.
A report presented in the House of Commons this week confirmed that the central banks QE program has squeezed the incomes of families and individuals and restricted companies from investing because the law regulates they have to top up pensions in the event of a shortfall. In effect, QE has had the opposite effect of what the bank supposedly intended. And this in a country that is supposedly a democratic society!
Pensions expert, Ros Altmann said the banks policies devalued the incomes of pensioners and has hampered spending power. The bank themselves admitted that “everybody is feeling the pinch” because inflation is running at a higher rate than the increase in wages. The bottom line is QE drives up prices which subsequently reduces
demand. Altmann added that without quantitative easing the “the economy will be freer to grow than if we do.”
If Carney is to rescue the UK economy he has to reverse the status the policies in the last four years have left. Instead of reviving the UK economy by keeping interest rates at an all-time and preventing the financial growth of companies and individuals the Bank of England has prolonged the UK recession.
UK house prices enjoyed the fastest rate of growth in January, but leading mortgage lender, Nationwide say that the low number of first time buyers is a “cause of concern.” The government backed Funding for Lending Scheme which was launched in August last year has made cheaper mortgages widely available, but with the average house
price in the UK costing £162,245, young people are still being priced out of the market.
In the past first time buyers have accounted for 40% of housing transactions with around 32,000 buyers a month in England and Wales. Since the housing market collapsed in 2007 that figure has dropped to around 20,000. Despite FLS making mortgages more accessible to buyers, banks are still demanding a 20% down payment which first time buyer´s cannot meet.
Despite the Nationwide describing the UK housing market as concerning they do believe there are “encouraging signs” thanks to the Bank of England´s Funding for Lending Scheme that allows mortgage lenders more access to more than £80bn of low interest finance. The scheme has helped to fuel the housing market in the last few
months but in doing so will also cause house prices to gradually rise.
Soaring UK house prices
The current housing situation in the UK has to be one of concern for future generations. We are currently in what has been dubbed the “Boomerang Age” whereby teenagers leave the family home to attend University, but return back to their parent´s home with huge debts and no chance of securing a mortgage. Even if they find employment increased rent prices and high repayments on student loans is a strain on their income.
The inevitability is that children will be living with their parents well into their twenties, if not their thirties. Some parents are taking out second mortgages to help get their children on the property ladder, but this could ultimately affect their retirement funds. FLS has made interest repayments on mortgages affordable for now, but they will increase in four years and is likely to cause financial distress for borrowers.
Another scenario is people who choose to rent may be doing so for years and never actually own their own property. This will decrease the value of their estate and children of future generations will not receive much inheritance. In turn they will not be able to afford their own property either. If UK house prices continue to rise and young people
are so saddled with debt they cannot afford a mortgage, future generations in Britain will never own property.
London House Prices Masking UK Economic Woes
House sales in London enjoyed the best rise in prices for five years in January. New Year sales in the capital picked up considerably and resulted in a 3.5 per cent increase on house prices in December 2012. House price in the UK capital are up to an average of £480,890, a 9.7 per cent increase in comparison to the same time last year.
One of the reasons for the upsurge of house purchases in the capital is due to executive housing developments along Canary Wharf and the old Battersea Power Station – the latter attracting wealthy foreign investors who are splashing out around £6m on the luxury apartments. Meanwhile they are driving house prices up across the city. According to recent National Statistics, house prices across the UK also saw a 0.2 per cent rise but this could just be a reflection of the steep rise in London.
It is estimated the new properties make up for 29 per cent of sales and housing market analysts representing Rightmove feel the influx will balance supply and demand. Not if they are all been snapped up by Europe´s elite as investments they won´t! Foreign investors with concerns about the unstable economic situation in the Eurozone and China helped to boost the value of London house prices in 2012. Meanwhile, many British families formerly living in London moved in boroughs in the South-East.
UK house prices predicted to climb
A new report published by the Centre of Economics and Business Research predict house prices in the UK will enjoy a 0.8 per cent increase this year and surpass the 2007 pre-crisis peak in 2014. The government backed Funding for Lending Scheme which makes loans available at affordable rates has returned confidence in the market, but is another economic crisis waiting to happen.
Critics of the scheme claim the banks have been given too much control over low-interest loans and the scheme is open for corruption. Low repayments on the loans expire after four years and could leave borrowers struggling to meet repayments. When the bubble bursts the crisis floods the country.
The steady increase in house prices since the FLS was introduced in August 2012 helps the statistics appear that the economy is growing and Britain is finally recovering from a double-dip recession. In comparison however, the British Retail Consortium published a survey which revealed one in five British families cut back on their Christmas spending last month – a fairer reflection on the economy than a rise in London house prices purchased by wealthy investors seeking profitable rentals in the UK.
Bank of England Quiet on UK Interest Rates
The Bank of England´s Monetary Policy Committee (MPC) has been noticeably quiet lately after receiving criticism about the stance on interest rates. The UK base rate has been held at an all time low of 0.5 per cent since March 2009 and a report issued by the bank in November indicated interest rates would not be lifted at least until the end of 2013.
The banks stance has received heavy criticism and are being urged to increase interest rates sooner rather than later. Attempts to boost the economy with £375bn of quantitative easing did little for the country other than the wealthiest ten per cent. Financial commentators are getting restless with the lack of alternative action the bank is prepared to take.
The desperate financial crisis that is wreaking havoc in the Eurozone is not helping Britain´s cause in terms of export and import – or at least that´s what the papers say. Official UK statistics tell a different story valuing UK trade exports rising by £0.1 billion, and imports falling by £0.1 billion. That means the UK is selling more than they are buying.
How will US policy affect UK interest rates?
Across the pond, the US Federal Reserve has announced it does not plan to raise interest rates until unemployment falls below 6.5%. The US economy is in an even worse state than the UK and the FED are holding interest rates below 0.25 per cent whilst at the same time using the same quantitative easing methods that have failed in Britain.
Given the codename, Operation Twist, the FED has already bought $85bn (£53bn) worth of government bonds and mortgage-backed securities. Operation Twist was first trialed by J.F.K in 1961 and although it did reduce the long-term interest was still labeled a “gimmick” because the economy was improving anyway.
The central banks in the UK, US and in the Eurozone are using QE to encourage credit spending and monetary expansion. The results are intended to moderate the pressure caused by debts incurred through overseas trading. Although it QE has failed in the UK thus far, the economy is nonetheless slowly recovering – except it is doing so naturally as businesses did not bite the banks cherry.
Last August the bank launched the Funding for Lending Scheme which is designed t encourage banks to lend low-interest loans to small businesses and home owners. The corporate money men didn´t take the bait so the bank has turned its attentions to the general public. FLS has also received criticism from economists and the scheme does suggest we will be heading for another financial collapse before the end of the decade. Meanwhile the bank remain resilient about keeping UK interests low and have gone quiet because economists have unveiled their plans for financial failure.