Money Matters

Green Shoots & Interest Rates

Well, it may be Autumn, but it is still just early Spring, economically. Whilst we have seen some green shoots of recovery, those shoots stem from some slightly dodgy ground! There have been some decent increases in the manufacturing and service sectors, the number of first-time house buyers has increased by 45% (from a very low base, admittedly) and unemployment is decreasing – with a startling 67% increase in construction and property jobs leading the way. However, recent figures show that the average starting wage for new employees is £8 per hour, not dramatic information in itself, but 6 years ago that figure was £8.50 and inflation has averaged a little over 3% per annum, over that time. In addition, for the first time in years, credit is increasing, with the finance for purchasing second hand cars increasing by 18%. Household re-mortgaging has also increased substantially too. The last thing that the UK needs, is a credit-driven boom; we have seen too much evidence of such activities, in the past, and such recoveries tend to be built on sand, particularly in a climate of wages that are decreasing in real terms.

I don’t wish to be curmudgeonly, and clearly the stock market movers and shakers have not been too unhappy with the way that things have gone over the last year or two, or markets would not have increased in the way they have. However, I think that there needs to be a considerable amount of further economic recovery – built on solid ground – before markets move on substantially. Not that there won’t be further rises in the UK stock markets in the next few months, but in order to reach the previous highs, and then establish those levels as a basis for really significant future gains, there has to be a stable economic foundation in the UK and worldwide.

Our celebrity governor of the Bank of England has recently advised us that interest rates are likely to remain at current levels until 2016. Despite the fact that we would rather pay less interest than more, savers have been suffering with these low High Street savings rates for some six years now, and are praying for some kind of reprieve. Given that 10-year gilt yields have doubled over the last year (to 3%) the current rates do seem to be out of kilter, and it may be that the Governor has to change his mind before then. Given this, and the fact that there have been increases on both the LIBOR and ‘Swap’ rates – those that mortgage lenders use to calculate their fixed-rate deals – it was no real surprise to me, to see the first increase in a 5-year fixed mortgage rate that I have seen in several years. With circa 3% deals still available to those with a reasonable deposit or equity, we may be in a buy now, while stocks last situation, as far as such schemes are concerned. Given an opportunity to lock into low rates until 2018, I think this might prove to be a very wise decision.

David Foot

Categories: Money Matters

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