Wednesday 14th December 2011

It’s well known that Labour’s Plan B would result in an extra £326bn of borrowing over the course of this Parliament, but new figures show it could also result in a loss of £89m a year to the local Stratford economy.

On the day the Coalition Government was formed, UK Gilt yields (interest rates) were similar to those of Spain and Italy, yet today they are 4.8 percentage points lower than Spain’s and 4.7 points lower than Italy’s.

Spain and Italy have both been punished by the markets for their lack of a credible deficit reduction strategy, whilst the UK is being seen as a safe haven with record low rates as a result. Labour’s plan to borrow £326bn more and as a result only quarter rather than eliminate the deficit, would undoubtably see our interest rates rise to those of Spain and Italy, hitting every day people hard.

Why, because, rather than being based on the Bank of England Base rates, fixed rate mortgage rates are based on 10 year gilt yields or market interest rates. This means an increase in the cost of government borrowing will result in an increase in mortgage costs.

The average UK mortgage is £109,643 so a 1% increase in mortgage interest rates would see an average family paying a £1,096 a year in interest. If rates increase to those of Italy the average household would see their annual mortgage bill rise by over £5,000.

Here in Stratford there are 17,870 households with a mortgage, who if they each had to find an extra £5,000 a year would collectively be paying an extra £89.35m. That’s £89.35m less that they can spend in our local economy.

1 comment:
Jonathan C
Falling gilt yields are indicators of both success and failure; the UK's ability to repay its sovereign obligations is highly-rated (investors prefer UK to European sovereign debt), but unproductive gilts are also preferred to investments in the 'real' economy. Which sentiment dominates? The latest falls were triggered by the unexpected rise in UK unemployment, the spread (2 to 10 year) shrank indicating lower confidence in even medium term recovery) and the pound sank again: after the Euro, this makes the pound the worst-performing developed-nation currency (cf Bloomberg). Interest rate rises hit borrowers hard, but reward savers and those on fixed incomes. Since the low interest rates have not increased the flow of capital to economic growth, this 'medicine' is pretty bitter.
Mortage holders would be badly affected, but having actual fixed rate mortgages (i.e. 10-30 years) would help. Britain's refusal to deploy these mortgages links monetary policy to domestic expenditure in an entirely unhelpful way. Anyway, people punished by inflation and wage and benefit cuts, or those in or facing unemployment, may well see an evenly-spread requirement to spend a bit more on their mortgages as a reasonable trade. Care to ask them?
Sunday 22nd January 2012