The Great Recapitalisation

The Bank of England has now left the Base Interest Rate unchanged at 0.5% for 3 years. As I have commented in previous posts, this is noteworthy not only for the fact that this rate is the lowest ever set by the Bank in their 300 year history, but it is also highly unusual for the rate to be kept stable for such a length of time. (Of course, in the background, the Bank have been effectively lower rates even further by the programme of Quantitative Easing).


My view remains that the Bank of England will keep the Base Rate at 0.5% for the rest of 2012 at least, and you would have thought this would give some comfort to the millions of mortgage account holders. However, events over the last couple of weeks has shown a growing disconnect between the Base Rate and the "real" rate as set by the London Interbank Rate, or LIBOR for short.


As tensions begin to rise once again over the almost inevitable Greek default, so does the mistrust, and Banks are having to pay more to borrow money to lend on to mortgages and loans. On top of the funding requirements, banks have been ordered to shore up their financial strength and recapitalise under the terms of the Basel III Accord.


Citing the increase in funding costs, Royal Bank of Scotland, Halifax and Bank of Ireland have all signalled they intend to increase the Standard Variable Mortgage Rate (or SVR) over the next few months. RBS were the first to announce an increase, from 3.5% to 3.99%, followed by Halifax, who have announced that the "cap" on their SVR would also increase by a similar amount. Yesterday, Bank of Ireland announced that their SVR would increase from 2.99% to 3.99% and then to 4.49% by September, hiking mortgage payments by as much as 65%. I suspect that other Banks will follow suit in due course.


Many affected mortgage holders will be able to move to other Banks or find new deals, but a fair percentage will be unable to, due to the stricter lending criteria now in place.


It is clear that SVR's of 3% are not sustainable in the long term, and the Banks do need to go some way to repair the damage of the last four years, and by increasing the margin over and above deposits will assist in this regard. It is also possible that savers may at last get a little joy as Banks compete for deposits by offering interest rates that are a little more tempting than the last three years.


That said, from a macro-economic viewpoint, I believe these early interest rate hikes to be dangerous, and quite likely to derail the very tentative UK economic recovery. Hard pressed consumers are already faced with above inflation increases in Gas, Electricity, Petrol and food prices. Add a hike in the monthly mortgage payment in the mix, coupled with static incomes, and it is fairly evident that consumer discretionary spending may suffer as 2012 progresses.