- By Faisal Islam
- Economics editor
Liverpool’s Christmas market is in full swing
The seasonal spirit is alive at Liverpool’s Christmas market. Amid the roasted chestnuts and personalised decorations, it does not seem like these are hard economic times.
But scratch the surface and it doesn’t take long to see the economy is far from taking off or really truly turning around from the cost-of-living crisis.
There are fears about what is to come in January and February.
A father tells us rather matter-of-factly that he has just been repossessed and moved back in with his parents, after mortgage payments shot up on his flat.
A woman from Southport says she sold her car, after her car insurance premiums suddenly more than doubled to £115 a month.
A large swathe of the country is having to make significant adjustments to keep afloat amid still high prices and interest rates.
While the inflation rate has fallen below 5%, the sense here, and the evidence in the wider numbers, is that the country can’t yet call time on the cost-of-living crisis.
A turning point has been definitively called elsewhere.
In the US, the man in charge of setting its base interest rates, the Federal Reserve chair Jerome Powell, said it was time to start a discussion about rate cuts. In the absence of a further shock, the Fed has now dispensed all its inflation-fighting medicine.
This “pivot”, as it is known, has been called in financial markets in recent weeks.
The markets have been betting that rates will be cut over the coming year, and that has had the effect of automatically pushing down the cost of borrowing for fixed loans.
The economy has not fallen into recession, as had been widely expected
David Williams, a Merseyside mortgage broker, is relieved to be able to offer two- and five-year fixed rate mortgages beginning with the digit 4 again. At times this year 6%-plus has been the norm. But it is still a shock for the hundreds of thousands rolling off fixes on ultra-low rates.
The reduction in market rates has been less pronounced in the UK than elsewhere. And this week the Bank of England chose not to pivot on base rates like its American counterpart. Here, says Bank governor Andrew Bailey, it is not yet the time to talk about rate cuts.
In its deliberations on holding rates the Bank pointed to inflation falling back less here, and that wage inflation was “considerably higher in the UK than elsewhere”. No “Mission Accomplished” banners for the Bank of England.
Inflation in the UK is no longer stuck, but it is still stickier than in other major economies, and that means less room for rate cuts.
Another significant feature over the past few months, however, is that the economy has not fallen into recession as had been widely expected. It was not an unreasonable forecast given a clobbering from a trebling of energy prices, a surge in mobile and broadband bills, and in borrowing costs too.
At the Autumn Statement last month, the Office for Budget Responsibility pointed to the fact that the economy so far would have received a net boost from rising interest rates. Broadly speaking, across the economy, the extra savings income for some households has to date outweighed the extra mortgage costs.
Mortgage broker David Williams says people are lengthening home loans to keep payments down
On top of that, as I wrote in the summer, banks have been going out of their way to avoid repossessions. A bank boss told me at the time that as long as someone was willing to pay anything towards their mortgage, they would keep people in their homes.
Mortgage broker Mr Williams confirms extraordinary flexibility on lengthening mortgages to keep payments down. “When we come to remortgage, they are going longer – anywhere between 10 and 15 years, depending on their age,” he tells 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 the hit to the consumer from rate rises has not been as hard as expected so far. The Bank of England points out that about half the impact is still to come, as people roll off old mortgages. January and February could indeed be tough.
There’s no change in interest rates and there may not be one for months, says the Bank of England. But there’s no growth forecast for the economy either for the best part of a year, if its projections are to be believed too.
It is a softer landing than expected. But there’s no take-off on the horizon either.
