Death of the Mini-Budget and borrowers, savers, pensioners
Simple question: what are the ramifications of the scrapping of the mini-Budget for borrowers, savers and investors? Go go go. Deadline is NOW.
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9 responses from the Newspage communityCopy all
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Backtracking isn't going to help millions of mortgage customers who have already been left up the creek without a paddle. This may calm the markets, but mortgage lenders are currently swamped with applications due to the tidal wave that followed the now doomed mini-budget. Lenders are not just going to lower interest rates overnight because they will drown with a further influx of applications. The average worker is not only now facing sky-high mortgage payments, but with the scrapping of the reduction of the basic rate of tax and the undecided future for the energy support post April, the British public have been well and truly been hung out to dry.
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The hope is that the cost of mortgage borrowing will at least come down a bit rather than continue to rise. We are now in the crazy position where ten-year fixes are cheaper than many two or five-year deals and we need some normality to come back to the market.
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It feels like the government are playing darts whilst wearing a blindfold. This U-turn just shows what a complete farce the past 4 weeks have been. I don't expect to see mortgage rates reduce anytime soon, as there is still a lot of uncertainty in the air which will cause the Bank of England to play it cautiously. I won't be surprised if we see a base rate increase of 0.75% to 1% in November. Let's not forget, lenders also appear to not want to lend at the moment so their fixed rates do not have to drop, however, there may be light at the end of the tunnel with 5-year swap rates dropping to 4.1% and 2-year swap rates dropping to 4.7%. The biggest hammer blow is the shortening of the energy bailout to April, with many people paying nearly £200 a month extra for their mortgage, £150 more for fuel in their vehicle and an extra £100 on their monthly food shop, a further increase in energy costs in April is something people do not want to even contemplate. This decision could see Liz Truss become the shortest serving Prime Minister the UK has ever seen.
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On a day where gilt rates could have increased further as the Bank of England withdrew its support for the bond market, they have simply stabilised. This means mortgage rates shouldn’t go up further in the near term. Savers are having a bonanza with 1-year savings bonds in excess of 4%. They will stay there for now, but if there’s more chaos they could go up further still. The era of the saver may be back.
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Financial markets do not like uncertainty and they do not like Liz Truss. For as long as Truss clings on, the markets face a double whammy of Prime Minister they've lost confidence, and uncertainty over when she will be replaced and by whom. Today's positive market reaction to our new Chancellor and his actions could therefore be short-lived.
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Unfortunately this so called mini-budget u-turn, will in reality do little to help the massive economic issues we are facing. We will still have sky high inflation, energy prices through the roof, turmoil in the conservative party and its extremely likely the base rate will increase next month. We may see some small benefits from a slightly stronger pound and lower bond yields which helps mortgage rates. However this could be short lived, as sentiment in financial markets can change in a heartbeat when the next crisis comes along.
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The sweeping reversal of Truss's mini-budget should bring economic stability and may see fixed rate mortgage products become temporarily cheaper, if gilt yields continue today's decline. Though they will probably increase again around the time of the next Bank of England MPC meeting on November 3rd, when the base rate is widely expected to be hiked by at least 0.75%. The caveat is political instability. The PM's position is looking more precarious with each passing hour. Jeremy Hunt's statement is a total humiliation for her and her days look numbered.
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Potentially we may be looking at a U-turn on interest rates, which will favour borrowers and negatively affect savers. However, it may be too late and the damage may have already been done. As of Monday lunchtime, we have seen no early indications from lenders that they intend to change anything yet. It could well be that it takes a few days or weeks before we see any kind of movement as they keep rates high in order to get on top of the volumes they have been facing lately.
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We are in one of those perfect storms where asset classes become more closely correlated, that is they behave the same. The usual safe havens of gilts are now carrying more risk than many so called riskier asset classes. Anyone carrying debt that is not on a long fixed rate will suffer as rates return to levels many people have never experienced before. The winter of discontent and the troubles of the 1970s may turn out to be child's play compared to 2023.