- Written by Faisal Islam
- economics editor
The spirit of the season is alive and well at Liverpool’s Christmas Markets. With roasted chestnuts and unique decorations on display, it’s hard to imagine that these were tough economic times.
But it doesn’t take long to scratch the surface and realize that the economy is far from getting back on track or truly turning around from the cost of living crisis.
I’m worried about what will happen in January and February.
One father told me, rather matter-of-factly, that his apartment had been foreclosed on and he had just moved back in with his parents because the mortgage payments had skyrocketed.
A Southport woman said she sold her car after her car insurance premium suddenly more than doubled to £115 a month.
With prices and interest rates still high, large areas of the country are being forced to make major adjustments to maintain their livelihoods.
Although inflation is below 5%, the sense here and the evidence in the broader numbers is that the country is not yet ready to address its cost of living crisis.
The tipping point has been definitively called elsewhere.
In the United States, Federal Reserve Chairman Jerome Powell, who is responsible for setting benchmark interest rates, said it was time to start discussing interest rate cuts. To prevent further shocks, the Fed has released all its anti-inflation drugs.
This “pivot” has been known in financial markets in recent weeks.
The market expects interest rates to be cut next year, which will automatically push down borrowing costs for fixed loans.
Merseyside mortgage broker David Williams is relieved to once again be offering two-year and five-year fixed rate mortgages starting with the number four. This year, 6% or more has become the norm at times. But it’s still a shock to hundreds of thousands of people who will start fixing with ultra-low interest rates.
In the UK, the reduction in market interest rates has been less pronounced than in other countries. And this week, the Bank of England chose not to focus on benchmark interest rates like the American banks. Here, central bank governor Andrew Bailey says it is not yet time to talk about rate cuts.
In its deliberations on keeping interest rates on hold, the central bank said there had been less of an inflationary rebound in the UK, with wage inflation “considerably higher in the UK than in other countries”. There is no ‘Mission Accomplished’ banner at the Bank of England.
Although UK inflation is no longer at a standstill, it remains sticky compared to other major economies, meaning there is less scope for rate cuts.
But another important feature of the past few months is that the economy has not fallen into recession as widely expected. This was not an unreasonable prediction given the threefold increase in energy prices, soaring mobile and broadband charges, and even higher borrowing costs.
In its fall statement last month, the Office for Budget Responsibility pointed to the fact that the economy would have previously received a net boost from higher interest rates. Broadly speaking, across the economy, the additional savings income for some households has so far outweighed the additional mortgage costs.
On top of that, as I wrote over the summer, banks are doing everything they can to avoid foreclosure. The head of one bank told me at the time that they were going to keep people in their homes as long as someone was willing to pay whatever they wanted for their mortgage.
Mr Williams, a mortgage broker, acknowledged that he has extraordinary flexibility in extending mortgages to reduce payments. “Remortgage refinances are long term, between 10 and 15 years, depending on age,” he told me. This may come back to haunt homeowners in the future, but for now everyone is content to “extend and pretend.”
The overall result is that so far, rising interest rates have not hit consumers as hard as expected. The Bank of England says around half of the impact is still to come as people repay old mortgages. January and February can certainly be tough.
Interest rates remain unchanged and may remain unchanged for several months, the Bank of England said. But if you believe that prediction, there is also no prediction that the economy will grow at the best time of the year.
It’s a softer landing than I expected. But there’s also no possibility of takeoff on the horizon.