SO the Bank of England, entirely unsurprisingly, kept its base rate unchanged yesterday, as advocated by almost all economists. I, together with a tiny number of dissidents, thought rates should go up, to send a signal to the markets that extreme measures were no longer required and that it was time to start readjusting to reality. Given that the OECD is predicting the UK will grow by 1.7 per cent this year, faster than any G7 economy bar Canada, this seemed sensible.
In truth, however, yesterday’s decision didn’t really matter either way. The real – as opposed to psychological – impact of a quarter point rate hike would have been trivial. What really matters are market forces and they are already sending a very strong signal to consumers. Even though the Bank has kept official rates on hold, the price at which individuals and families can borrow has changed drastically in recent months. Credit has become a tale of two, completely opposed halves: unsecured lending – which is higher-risk for lenders – has become much more expensive. Mortgages, by contrast, are becoming cheaper – though of course larger deposits are often required these days.
Michael Saunders, economist at Citigroup, has analysed the figures, published yesterday by the Bank of England. The average overdraft rates rose to 19.10 per cent in August from 18.89 per cent; they are now the highest since data began in 1995. Average interest rates on credit cards and personal loans were stable this month, but remain high; at 16.7 per cent, the average rate on credit card debt is the highest since 2002. In the three years since August 2007, when the credit crunch kicked off, Citi calculates that average overdraft rates have risen 1.29 percentage points, credit card rates are up by 1.48 percentage points, rates on a £10,000 personal loan are up 3.30 percentage points and rates on a £5,000 personal loan have soared a whopping 4.06 percentage points.
All of this, needless to say, is bad news for borrowers; but this repricing of credit does make a lot of sense economically. One of the great lessons of the crisis (albeit one which the politicians refuse to heed) is that debt was too cheap and that consumers gorged on far too much of it. The primary reason for today’s higher interest rates on unsecured debt is the surge in personal bankruptcies, as well as the fact that UK banks made record write-offs on unsecured debt in the second quarter. Previously imprudent financial institutions have finally remembered that lending lots of money to people with little or no collateral is a risky business.
But there are also plenty of winners from the new economic order. The average tracker mortgage rate fell from 3.72 per cent in July to 3.55 per cent in August, the lowest rate for many decades (and perhaps even for ever). The two-year fixed mortgage rate dropped to a record low of 3.74 per cent in August. Three-year and five-year fixed mortgage rates also fell; the average five-year fixed mortgage rate is now down by 0.4 percentage points since April. The primary reason for this sharp drop in mortgage rates is that UK gilt yields – a key benchmark for private sector yields – have collapsed since the formation of the coalition government on 10 May, thanks to its commitment to a sharp reduction in the budget deficit. Life has become much tougher for credit card borrowers; but homeowners have austerity to thank for their cheaper mortgages.