The fall of the British pound sterling due to tax cuts has also started to have a negative impact on the real economy. The Financial Times (FT) reported on the 27th (local time) that six major financial institutions, including HSBC and Lloyd’s Banking Group in the UK, had suddenly suspended mortgage lending. Financial market turmoil, such as a surge in UK government bond yields and a fall in the value of the pound, has started to spread to the real economy, including real estate.
Other mortgage companies, including Kensington, Accord Mortgage, Hodge and Virgin Money, have also suspended mortgage lending, according to Bloomberg, The Times and The Guardian. The Wall Street Journal noted that “unlike the US, fixed-rate loans with 30-year maturities are widely available in the UK. With the recent surge in government bond yields, market mortgage rates have also risen sharply. In a situation where interest rates are skyrocketing like now, the more mortgages that are issued, the more vulnerable British financial institutions are to risk. A lending freeze could put downward pressure on house prices, reducing the value of collateral, and at the same time create more people who cannot repay their debts. That is why this measure can also be interpreted as a preventive risk management dimension.
The large-scale tax cuts announced last week by the Leeds Truss government have the de facto effect of loosening money in the market and clash with the tightening monetary stance of the central bank of England (BOE), which is raising interest rates to catch inflation. . As the UK’s fiscal deficit grows, it will issue more government bonds, which will plunge the price of government bonds and at the same time cause interest rates to rise sharply, increasing the government’s interest burden. Concerns that the UK economy could plunge into recession are also leading to higher Treasury yields. The yield on the five-year British government bond was 4.699% that day, which is higher than Greece and Italy, the ‘sick of Europe’. In other words, when issuing government bonds, they have to pay higher interest rates than Greece and Italy.
Ray Bullzer, an analyst at mortgage broker John Charcoal, told the FT: “The surge in bond yields means that mortgage companies are also rebalancing their mortgage prices very significantly. This is the first time since the 2008 financial crisis for prices to be set again. in the mortgage market.”
Credit Suisse warned that “a combination of interest rate rises, inflation and an economic downturn can have a serious impact on the real estate market.” The market expects the BOE to raise the base rate from 2.25% to 3.5% at the next monetary policy meeting by 1.25 percentage points. The figure is expected to be more than 6% next year.
As bond yields increased on the 28th, the BOE decided to postpone the sale of government bonds scheduled for the first half of next month and buy government bonds indefinitely from this day to October 14. The BOE said in a statement on the same day that “continued market dysfunction would pose a significant threat to the financial system.” The yield on the UK’s 30-year Treasury bond was above 5% for the first time since 2002, but plunged more than 70bps after the BOE announced they were buying bonds.
Investment magazine Barrons said the UK economy is likely to decline further. At the end of 2007, it was valued at $2 per pound, but has now fallen to $1 per pound and is expected to fall below parity (equivalent). What the market is worried about is that the government is going in a different direction to the BOE as the BOE raises interest rates desperately to contain the steepest rise in inflation for 40 years. This is because fiscal and monetary policies conflict.
The volatility of the UK financial market reminds us of the pound crisis of 1976. At the time, Britain devalued the pound and asked for a bailout from the International Monetary Fund (IMF). Barrons pointed out that if the situation gets this bad, it is inevitable that the opposition Labor Party will win the next general election. “This crisis will give the BOE test to the market,” said Casper Hens, senior portfolio manager at BlueBay Asset Management, according to Dow Jones. It has to change,” he said.
There are investors who have made huge profits even in troubled times. Crispin O’Day, founder of Oday Asset Management, one of London’s leading financial market hedge funds, established a short position in the pound and British government bonds. According to the FT, its funds are up 145% this year. “The pound is still very fragile and we have to see how it progresses,” he said.
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