That’s you all set Mr Duffy… Your new mortgage is approved at a fixed rate of 13.5 per cent.
These were the immortals words as I took out my first mortgage in 1989. It was only a small mortgage of £30,000 sitting nicely in the MIRAS (mortgage interest relief at source) bracket, where I scooped a little bonus. But, alas, I still had to pay a mortgage insurance product of absolutely no use to me whatsoever. But, if I wanted the cash, there was no escaping. I was now on the mortgage ladder and paying a small fortune in interest each month for my semi-detached in Glasgow. At the same time, my parents were being offered fixed-rate savings products at 8 per cent. But oh, how things have changed as we muddle along with ultra-low interest rates these days. The current Bank of England interest rate sitting at 0.5 per cent stills seems like we are living in an alternative dimension. Many commentators suggest things must change. If not, we are heading for a debt pile that will take decades to clear, while savers will get no redemption, opting to put their money “offshore”.
The Monetary Policy Committee (MPC) that meets normally about eight times per year sets the Bank of England’s base rate. The media likes to shorten this to the “interest rate”, which chimes with us all as the benchmark on how much money costs or how much it is worth. For borrowers looking to climb the mortgage ladder, the cost of money is important. For savers looking to get some bang for their buck, higher interest rates mean more security. The MPC has to balance many extraneous variables to decide who wins and who loses. But, as we are living in times of austerity with interest rates so low, it seems that there is no end in sight for savers, while the mortgage market booms. The MPC appears lost in conflicting data, unsure and unsteady on its feet. Mark Carney, the Bank of England governor, has made many contradictory statements and while he has tried to telegraph what is ahead, the landscape keeps shifting. So, what would you do if you were him? Change the rules of the game, of course…
The MPC functions on data, year to date, year on year, month to month, report to report, analysis, comment from think tanks and so it goes on. Armies of analysts scrutinise, churn and flip numbers, which then feed up the chain to the members of the committee. The Holy Grail of all of this is to set the interest rate so as to achieve an inflation target of 2 per cent. Yes, 2 per cent is the bullseye for Mr Carney and his fellow economists. But, data alone will not get us back to where we arguably should be sitting in term of interest rates. And now the bank is waking up to how ridiculous and anachronistic this metric really is.
Forward guidance has been art and part of Mr Carney’s communications strategy. A signal of what is to come and the rationale behind it. The rationale is all based on data. And we all know about banks and data, human error and “computer says no”. It is all fraught with danger as it lacks context. So, hey presto, the Bank of England has now created a new measure or indicator or communication tool. It is trying to put a new number on reality for us all, albeit the true reality is yet to come as interest rates require to hit 3 to 5 per cent.
After months of research, with much head scratching, the bank will provide an estimate of the Goldilocks interest rate for the very first time when it announces its policy decision on 2 August. This new rate known as the r* (r-star) will keep the economy neither too hot nor too cold in the long term. This time, I hope though, that Mr Carney does not need to backtrack too much. I hope he and his team have used some of their “Spidey senses” to feel what is going on, as opposed to analyse and predict.
At last, the Bank of England is throwing off the pinstripe suit and donning some skinny jeans as it tracks us gently towards higher interest rates wrapped up in softer, more meaningful language that is less black and white and more modern art. Progress indeed.
Jim Duffy MBE, Create Special