An unhealthy obsession

Despite all the problems of the last few years, when Brits are asked which they think provides better security for the future -- property or pension -- they almost unanimously plump for property. It's not hard to see why. Public policy is still geared towards keeping the property market afloat at almost any cost, in part because policymakers fear that a serious collapse in house prices would cripple the entire economy. Thus, when  pension consultants reported this week that the Bank of England's quantitative easing (QE) and rock bottom interest rates were decimating the value of savers' pension "pots",  the media almost ignored the story, and the official response was scarcely even a shrug.

In sharp contrast, news that UK banks are hankering to move some of their mortgage rates a smidgen higher have got the media into a fine old lather.  "Time to protect yourself against rising rates",  declared one of the quality papers today.  It may already be too late for some:  there was a young woman on the TV news earlier in the week saying that she would have to cancel her family's holiday plans as a result of the rate increase.    

What kind of rising rates are we talking about here? One bank, the Halifax, is increasing its so-called "standard variable rate" from 3.5% to 3.99%.  There are fears that other banks may follow suit, but that's it. The so-called "tracker" mortgages are unaffected, because there are no signs that the Bank of England is going to raise its repo rate, which is the benchmark that these things track.  It says much about the fragile and overextended nature of the UK housing market that such a small rate increase, one that still leaves rates at very low levels by historical standards, could be seen as such a threat.

The ECB is said to be starting to worry that its own QE-type programme, the so-called LTROs, may be getting banks addicted to cheap money. In the UK, that addiction has long since spread to consumers, and woe betide the bank, or for that matter, the central bank, that seeks to wean them off it.  The cries of pain when the Bank of England starts to unwind QE and, heaven protect us, raise interest rates, can only be imagined.

One reason that the increase in mortgage rates is raising hackles is that there are few signs that banks are willing to boost the rates they pay to the country's beleaguered savers. (Yes, I know I'm "talking my own book" here, as bond traders would say).  So why are mortgage rates rising?  Well, banks are finding it difficult to raise sufficient deposits from their customers to fund the gentle rise in mortgage demand, so they're having to tap wholesale markets. For most banks, the cost of raising funds in those markets has risen because of generalised concerns over the banks' creditworthiness.

And why are UK banks unable to gather more deposits from their customers? Well obviously, it's because they're paying such abysmally low rates that most savers will do almost anything with their money rather than leave it in the bank.  It's a real Catch-22. Any bank that dared to break ranks and pay more for people's savings would very likely find itself flooded with deposits, which would allow it to reduce its reliance on wholesale funding.  So far, however, none of the banks seems keen to give it a try.