RE: l l o y1 Oct 2022 15:09
Gilt yields suggest base rates will ultimately hit the 5-6 per cent mark. As a widely circulated chart from housing analyst Neal Hudson indicates, stretched affordability means rates of 6 per cent these days are roughly equivalent to the double digit levels endured in the early 90s. With one million households remortgaging over the next three quarters alone, according to Bank of England figures, higher rates will cause significant misery and forced selling, even if mortgage-free homeowners are able to sit tight and see it out.
In truth, housing is so important for the UK economy that the central bank seems likely to ease off the tightening sooner than investors expect. But that would mean higher, more persistent inflation - even before renewed sterling weakness is factored in.
Regardless, rates will be higher than previously predicted come the end of 2022. The widespread withdrawal of mortgage deals this week is a sign that market pricing is now in charge, regardless of what the BoE does in November. The government is holding the line in the meantime: a fiscal plan will be unveiled on 23 November. To wait eight weeks for an energy policy while a leadership election takes place may be regarded as a misfortune. To wait another eight weeks while the economy slips by the wayside looks like carelessness.
Yet the news there is unlikely to be any better when it does arrive: the odds are on a fresh round of cuts to public services as a way of belatedly demonstrating fiscal responsibility. But many such services are already on their knees, and their health is vital to the economy's own. As Office for National Statistics figures released this week show, almost a fifth of those aged 50-65 who have left the workforce since the pandemic - contributing to labour market shortages - are currently on NHS waiting lists.
So given widespread voter appetite for higher public services spending, the government may find its next plan does not survive contact with reality any more than the current one has. For investors, meanwhile, this all likely means more of the same: more drops in consumer demand, more pain for an import-driven economy, and more cut-price takeovers of UK companies.
source INVESTORS CHRONICLE
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