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Why the UK economy is one of the most vulnerable right now


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An investment strategist said that the U.K. has an economic anomaly which makes it “one the most vulnerable countries right now.”

Cribstone Strategic Macro’s founder Mike Harris says that Britain has a serious problem with its short-term mortgage market. While long-term mortgages are popular in Europe and the U.S., Brits prefer short-term loans with a term of five or less years. Popular tracker mortgages, which are subject to fluctuations with the Bank of England base rate, are also available.

CNBC interviewed Harris Friday to explain that the problem was rate hikes could immediately cause income loss for households, even though it would not solve inflation. The U.K. is a country which “imports inflation,” Harris said. Therefore, the Bank of England’s interest rate increases would not only balance supply and demand but also slow down consumer price rise.

“Here. “We’re not actually dealing with a situation that we want to slow, but rather trying to adjust expectations. The U.K., which imports inflation, is one of the countries we’re trying… He said that we are not in an effective position to focus solely on demand and supply.

“We are stuck in a position where global inflation drives our inflation at the stage. We have to hit consumers and we need to reduce the propensity for spending in the future. Instead of just decreasing the potential to spend, we actually take further money from the household income. This isn’t possible in the U.S.”

Bank of England raised interest rates by a quarter of a percentage pointThe BOE increased its base interest rate by 1% on Thursday. The BOE raised its base rate to 1% for the fourth time in succession, making it the highest interest rates since 2009. Inflation was forecast to reach 10% by the central bank this year due to rising food and energy costs, exacerbated in part by Russia’s provocative attack on Ukraine.

Harris stated that he twice asked the Bank of England for data about lending to the country. He said that this information was not kept by the bank.

Harris said that it is “absolutely crazy for a central banking to fail to appreciate the economic consequences of every rate increase.” Harris explained that while consumer behaviour would not change much in five years, it could over the next two years.

U.K. “facing the music”

A data source from UK Finance shows that 1.5 million mortgage agreements at fixed rates are set to end in 2022. Another 1.5 million will follow next year.

In data released on Friday, investment platform Hargreaves Lansdown calculated that someone remortgaging at the end of a two-year fixed term deal, following the latest interest rate hike, could see their monthly payment go up by £61. If the base rate hit 1.5%, Hargreaves Lansdown worked out that could add £134 to their monthly mortgage payments. A survey of more than 2000 adults in the UK, done for the platform in April showed that over a third would not be able to pay those additional costs.

Harris stated that the Bank of England has created an environment in which the rate rises are “probably going to destroy more of the demand than it should.” [former governor]Mark Carney and his team didn’t perform their duties as well as they could have.

This dynamic, he said was very similar to the one with the Federal Reserve before 2007’s onset of Global Financial Crisis. “They were allowing people mortgages even though they didn’t know they could repay them. If house prices fall because they needed to refinance so there is an inherent unsustainability.

Harris stated that the U.K. was on the stage now, “facing music.”

“I think the U.K. would be one of most vulnerable countries in this world because of that dynamic. The fact that central banks governors didn’t do anything about the issue, it still might make them some time,” he stated, suggesting that, if policymakers were able to extend the debt duration, they should act now.

Although a spokesperson from the Bank of England refused to comment, he pointed CNBC at recent statements made by Governor Andrew Bailey as well Chief Economist Huw Pil.

The two-year fixed mortgage has been more popular than the longer term. UK Finance stated that five-year fixed-term mortgages are becoming more popular. In 2021, 50% of the contracts were for this length, and 45% had two-year terms.

Bank of England data from last week showed that the “effective” interest rate — the actual interest rate paid — on new mortgages increased by 14 basis points to 1.73% in March — the biggest increase since at least 2016, according to Bloomberg.

The cost of living is squeezed

Huw Pill, Bank of England chief economist, spoke on CNBC’s Friday show “Street Signs Europe”. He also said that external shocks were responsible for the recent spike in inflation.

According to him, it is “uncomfortable” for central bankers to project a 10% rate inflation. This is far higher than the Bank’s long-term goal of 2%.

Pill said, “Ofcourse that discomfort must be seen in context of the true impact of the cost-of-living squeeze on households here in the U.K. It’s more painful to them than it is for policymakers,” Pill concluded.