Saturday, August 06, 2016

England, Cash, Interest Rates and all of that

Subtitle: How low can UK Interest rates go? And why?

Apart from the Hilarious BREXIT styled sign I saw at Geneva Airport as I jetted back from Engerland, it has been a very interesting week of Finance for us all


UK Interest rate at Central Bank (CB) now 0.25%

It is now so low that today's change is not able to be visibly drawn on this BBC chart!   Read the above linked article to find out why savers might just as well keep money under the bed and why BOE chose to make this change.



Why cut Rates then?

- Improves money velocity  (please Google it)
- Allows for greater loans to /kickstart/ the economy back into health

The theory at best then is, temporarily lower CB rates, which passes onto to Commercial Banks, get more money out to Business, who revive the economy,  and then you put rates back up again.

Buying Stocks is a similar tactic.  The Government buys stocks  (no really, I'm not making this up),  the Companies receive money, use it to invest, get better, everybody is happy.

The issue with stimulus is that stimulus does not guarantee results, you can lead the horse to water, but it still may not choose to drink.  Additionally Business may take the money, but if they are systematically Uncompetitive or for any number of other fundamentals making them just plain useless, funding will not help.



Rising House Prices
Unfortunately, lowered Interest rates mean lower Mortgage payments.  Or conversely if the lending rate decreases you can afford to borrow more.

Result?   Upward pressure on house Prices.

Savers and House Prices
The current requirement for a mortgage is an income and a 20% deposit.  For a first flat, cost of say 200K GBP  (it's a lot more in London, who have even less chance in the following calculation)

You would need 0.2 * 200K  =  40K GBP  deposit

What might stop you getting there?

- As young Professionals you may already have borrowed over 40K GBP to fund your University Education
- If you are saving money in a Bank or Building Society then as rates drop so do deposit rates.  You are getting nothing!

First time buyers have absolutely no chance of getting onto the housing ladder and rising house prices and lowered deposit rates are just making things worse



Brits Hoarding Cash




Read the above linked article as to why the cash-under-the-mattress level now exceeds 8 percent.


Some Counterpoints
I'm personally offended and suspicious of this continued BOE market and fiscal manipulation.  Mainly because it won't work and puts the Government and Central Bank into an ever more constrained and financially untenable position it can't back out of.  Some points to think about

- The current UK housing market is in pause.  Both buyers and sellers want certainty. BREXIT sans article 50 is just confusion.
- Housebuilders are in for a tough time, and not just at entry level
- Until the UK Gov triggers article 50, housing is in chaos
- As noted above even pre BREXIT its impossible for a professional couple to save for a deposit on a first home without Bank of Mum and Dad free loan assistance.  This is by definition class dependent. There are some shared ownership schemes but it's a drop in the ocean
- Since Mrs Thatcher, the British are obsessed and expect home ownership.  Since home capital appreciation is rife, they are in fact correct, so its unattainably hurts all the more.
- Most of us, especially in the UK, have too much stuff. Enticing and encouraging us to spend is all well and good.  But last time I checked we can just decide not to buy [the latest smartphone/ TV/ car/ sports-shoe ... etc], if the current one is working just fine.


Meanwhile in Switzerland
Not just the UK Central bank feels forced to meddle in increasingly murky waters.  Swiss National Bank  (SNB) June 2016 Balance sheet declaration astonishingly shows:



And it further details it has been buying US Corporate shares including AAPL.




What to do next
Well, heads up.  I did like Mervyn King's recent book.   You can read his analysis here.  It's more comprehensive than mine:

http://www.audible.co.uk/pd/Business/The-End-of-Alchemy-Audiobook/B01FE74KGI

But above all, do something to understand the fundamentals, don't pretend you are /too busy/ to understand or care