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

There is an economic peculiarity in the UK that makes it “one of the most vulnerable countries in the world right now”, according to an investment strategist.

Mike Harris, founder of Krebstone Strategic Macro, argues that the main problem for Britain is that its mortgage market is “too short”. While in the United States and other parts of Europe citizens love long-term mortgages, many Britons opt for short-term loans of less than five years. Tracked mortgages are also common which fluctuate with the Bank of England’s prime rate.

Harris told CNBC Friday that this was a problem as the price hike would immediately lead to losses in household income, when in reality it might not deal with the issue of inflation. He explained that the UK was an “inflation importing” country, so the impact of the interest rate hike by the Bank of England was not just a rebalancing of supply and demand that would slowly curb consumer price growth.

“Here. We’re really not dealing with a purely situation where we’re trying to slow down the economy, eventually trying to rebalance expectations, and the UK is an inflation importing country…so we’re not effectively in a position where we are effectively free to focus solely on supply and demand.”

He added, “We are stuck in a situation where global inflation is driving our own inflation at this point, we have to hit the consumer and instead of just reducing the propensity to spend in the future, we are actually taking more money from home. Income that is not happening in the US”

The Bank of England raised interest rates by a quarter of a percentage point on Thursday, while raising the base rate to 1%. This is the highest interest rate since 2009 and was the fourth consecutive rise for the Bank of England. The central bank also forecast inflation to reach 10% this year, with soaring food and energy prices exacerbated by Russia’s unprovoked attack on Ukraine.

Harris said he twice requested data from the Bank of England on how much to lend in the country for two years and how much for five years, but said he had been told the central bank had not kept that. Information.

Harris argued that “it is absolutely insane that the central bank does not appreciate the economic impact associated with each rate hike.” He explained that consumer behavior is not likely to change much in five years but will change over two years.

According to data from UK Finance, 1.5 million fixed-rate mortgage deals are set to expire in 2022, and another 1.5 million are due to expire next year.

In data released on Friday, investment platform Hargreaves Lansdown calculated that someone who re-mortgaged at the end of a two-year fixed-term deal, after the latest rate hike, could see their monthly payments rise by £61. If the base rate reaches 1.5%, Hargreaves Lansdown has calculated it could add £134 to your monthly mortgage payments. According to a survey of 2,000 adults in the UK conducted on behalf of the platform in April, more than a third of people will struggle to afford these additional costs.

Harris said that given the current rate hike “we are in an environment where we are likely to destroy more demand than we should because the Bank of England and [former governor] Mark Carney didn’t do their job as they should have.”

This dynamic, he said, was similar to the one that occurred with the Federal Reserve in 2007, before the onset of the global financial crisis, where “they were letting people take out mortgages when they knew they couldn’t pay them if home prices fell because they were exposed to it. So there’s a lack of refinancing. inherent sustainability.”

Harris added that the UK was now at a stage where it “is facing music”.

“I would say the UK is one of the most vulnerable countries in the world right now because of this dynamic and the fact that central bankers haven’t done anything about it, they might still have some time,” he said, noting if policy makers had Means to extend the debt period now, they should do it “actively”.

A spokesman for the Bank of England declined to comment but pointed to CNBC’s recent comments from Governor Andrew Bailey and chief economist Howe Bell.

In the past, a two-year fixed-term mortgage was popular because it tended to be cheaper due to the shorter lending period. However, UK Finance said the popularity of five-year agreements was growing with 50% of fixed-term contracts in 2021 with this duration, while 45% were with two-year contracts.

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

Speaking on CNBC’s “Street Signs Europe” on Friday, BoE chief economist Hugh Bell also noted that the rise in inflation was driven by external shocks.

He said it was “uncomfortable” for central bank members to expect an inflation rate of 10%, well above the bank’s long-term target of 2%.

“Of course this discomfort has to be viewed in the context of the real impact of cost-of-living pressures on families and businesses here in the UK, it is more painful for them than discomfort from a policy maker’s point of view,” Bell added.

He explained that the Bank of England was trying to use monetary policy to try to ensure that these drivers of inflation did not lead to persistently high prices, creating a stagflationary environment like the one that prevailed in the 1970s. But he said the central bank wanted to bring inflation down to the target level without causing “unnecessary fluctuations in the economy”.

Bank of England Governor Andrew Bailey told CNBC’s Jeff Cutmore on Thursday that the UK is experiencing an “unprecedentedly large real income shock to this country from overseas” on trade issues.

Bailey also defended the central bank’s more cautious approach to raising rates, with three dissenting members of its Monetary Policy Committee arguing that the Bank of England should be more aggressive in raising rates.