'I have been wrong in expecting interest rates to top out at 4% when they now are heading towards 6%. When you are wrong about something you need to work out why' 📧 So in today’s column, HamishMcRae5 attempts to give at least a partial explanation
a couple of weeks ago, the impact of a 6 per cent rate now is similar to that of a rate of double that in the 1980s – because the size of people’s mortgages is so much larger.
The simple answer to the puzzle is that while mortgage borrowers are doing worse – or at least some borrowers, for many people have fixed rates that don’t roll over for a while – savers are doing better. The result,is that in the short-term, the economy actually gets a boost from higher interest rates. We tend to forget that there are many more savers than borrowers, for the old rule of building societies was that there were five savers for every mortgage holder.
There are two reasons why this balance between savers and borrowers has changed. One is that the country piled up a huge amount of so-called excess savings during the pandemic – money that people would normally have spent but were unable to do so. Estimates vary, but the figure seems to be about £200bn, which is huge: nearly 10 per cent of GDP.
More important still, let’s see what the US Federal Reserve does. Our central bank doesn’t fix policy in isolation. All the main central banks, in particular the Fed and the European Central Bank, move in a convoy. If one speeds up there is great pressure on the others to do so too. Once it becomes clear that the Fed and the ECB have reached their peak rate, then that should signal the peak for us too.
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