Afternoon summary
Time for a recap.
UK borrowers continue to be hit by rising interest rates as the fight against inflation continues, and there may be more pain ahead.
Average two-year mortgage rate have risen over their peak last autumn, averaging 6.66% today for the first time in 15 years.
MPs have heard that rising mortgage rates are causing financial stress to customers, and that the situation will worsen. However, lenders also reported that they have not seen a significant pick-up in arrears yet.
Bradley Fordham, mortgage director at Santander UK, told the Treasury Committee the bank had seen a “small tick up in arrears, still 20% below pre-pandemic, 70% below 2009 post-financial crisis, so relatively low levels”.
He said mortgage customers coming off deals and going onto new ones were seeing payment increases of “over £200 per month”.
But, the UK could be approaching a ‘tipping point’ where mortgage rates rise to levels where borrowers cannot fully protect themselves by extending the terms of their loans or moving to interest-only deals.
The International Monetary Fund warned that UK interest rates may need to keep rates higher for longer, to fight inflation.
The financial markets are anticipating that UK interest rates will hit 6% by November, up from 5% at present.
The latest labour market report has shown that UK wages increased at a faster rate than expected in May.
Earnings growth hit 7.3% in the three months to May compared with a year earlier, driven by the strongest rise in private sector pay growth outside the pandemic period of 7.7%, the Office for National Statistics said. It was the joint highest since modern records began in 2001.
And with unemployment rising, number of job vacancies down, jobs growth slowing and more people looking for work, there are signs that the UK labour market is starting to slow.
And in other news…
Britain’s debt-laden “zombie” companies are expected to be wiped out by the surge in interest rates, an insolvency specialist has predicted.
Britain’s retailers recorded a sharp rise in spending in June as hot weather prompted consumers to buy summer clothing and outdoor goods, despite growing pressure on budgets from the cost of living crisis.
Morrissey has written to Jet2holidays urging the tour operator to drop its association with marine parks that continue to use captive orcas and dolphins for entertainment.
Updated
Deutsche Bank have predicted that the Bank of England will lift interest rates by half a percentage point next month.
Previously, Deutsche had forecast a quarter-point rise, from 5% to 5.25%.
But following this morning’s strong labour market data, showing wage growth running at 7.3%, it has upped its forecasts for the next meeting of the BoE’s Monetary Policy Committee.
Deutsche’s chief UK economist, Sanjay Raja, explains:
For now, evidence of still more persistent wage pressures will keep the MPC’s foot on the accelerator. A second consecutive 50bps hike now looks more likely than not.
Over in Moscow, the central bank has reported that Russia’s current account surplus shrank by 85% in the first half of this year, to $20.2bn.
That’s a sharp fall on the record surplus of $147.6bn in January-June 2022, when Russia profited from the surge in energy prices and also cut its imports due to sanctions imposed by the West.
The Central Bank of the Russian Federation said the drop in the surplus this year was due to a fall in volumes of exports, and lower prices for oil and gas, and other Russian commodities.
On a quarterly basis, the current account balance decreased to $5.4bn in April-June, down from $14.8bn in January-March.
Reuters adds that oil and gas revenues, the lifeblood of Russia’s economy, fell 47% year-on-year in January-June, which the finance ministry put down to lower prices for Urals crude and lower natural gas export volumes.
Meanwhile in Brazil, inflation has dropped to its lowest level in almost three years.
Annual inflation in Latin America’s largest economy slowed to 3.16% in June from 3.94% in May.
Brazil Inflation Ratehttps://t.co/FFaoEzL7Ky pic.twitter.com/EsaH4hzcWk
— TRADING ECONOMICS (@tEconomics) July 11, 2023
On a monthly basis, prices fell – by 0.08% – the first deflation registered since September of last year.
This may encourage Brazil’s central bank to consider cutting interest rates from their current six-year high of 13.75%….
Rate cut expectations are gaining momentum as Brazil's annual inflation reaches its lowest point in almost three years.
— Roensch Capital News (@RoenschNews) July 11, 2023
UK’s ‘zombie’ firms will be wiped out by rising interest rates
Britain’s debt-laden “zombie” companies are expected to be wiped out by the surge in interest rates, an insolvency specialist has predicted.
Begbies Traynor, a business recovery and financial consultancy, has said all of the nation’s zombies – companies struggling to service debts that have avoided bankruptcy through cheap borrowing costs – will have failed by the end of next year.
“Over the next 18 months, we’ll see virtually all of them finally come to an end,” Ric Traynor, the executive chairman of the company, which is seen as a bellwether for the health of UK businesses, told Bloomberg.
Thames Water: smart meters could curb hosepipe usage
Cathryn Ross has said that Thames Water is looking at using smart meters to charge households for excessive water consumption in order to curb the use of hosepipes.
She has taken aim at those with big gardens who “think that they care less about their water bills”.
The CEO explained:
“One of the biggest single useages of water is people watering gardens, if you put a hosepipe on for 10 minutes, that could easily use a typical daily consumption.
So what we are looking at now we are pushing ahead with the smart meter roll out, could we look at tariff innovation that charged a set amount up to 100 litres of water per person per day, maybe a bit more for 110 120 let’s say, and then if you’re using more than 130 we can start charging you really much more, that might send signals about more efficient water usage”.
She added:
“People [who] have bigger houses with bigger gardens, maybe they think that they care less about their water bill, maybe those are precisely the sort of people who could pay more so we could then take some more of that money and invest it in the network or invest it in social tariffs”
Thames Water CEO: Climate breakdown puts London's supplies at risk
Back at the London Assembly Environment Committee, Thames Water’s CEO has warned that water supplies are at risk in London due to climate breakdown.
When asked about whether supplies are resilient, Cathryn Ross said:
“In a nutshell we are living with an asset base that is older than we would like it to be, and even if it was in tip top condition if you were designing it today you wouldn’t be designing it in the way that we have it.
It simply is not capable of delivering the resilience that people want today in the 21st century.”
She said “numerous parts of the network” face a cocktail of problems and it is “not as resilient as we would like it to be”.
Ross added:
“The management of it during periods of extreme weather is becoming more challenging. We haven’t planned into business as usual what it takes to manage the resilient provision of water and waste water services in the face of climate change.
Today’s news of mortgage costs hitting their highest level in 15 years with an average rate of 6.66% will worry people further, at a time when “mortgage pressures on ordinary households are huge”, says Douglas Chapman, SNP MP for Dunfermline and West Fife.
Following today’s Treasury Committee hearing on the mortgage market, Chapman says:
Research this month from Citizens Advice Scotland reveals that around 11% of people always run out of money before payday, with a further 14% saying that this happens to them “most of the time”.
This percentage will surely rise given today’s Committee panellists’ discussing averages of £235 increases on monthly mortgage repayments due to large interest rises and deals coming to an end, which on top of a crippling cost of living crisis, consistently high energy prices and rampant inflation explains why many people feel their financial resilience is being pushed to the limit.”
“In addition, there was little encouragement for first time buyers today, who it appears need to spend longer amassing a larger deposit or tap into the Bank of Mum and Dad (which isn’t an option for everyone), and then also choose from a narrower portfolio of smaller properties in order to meet monthly mortgage payments and pass banks affordability stress tests.”
Updated
Lisa Nandy MP, Labour’s shadow housing secretary, has said the increase in fixed-rate mortgage costs today is a sign of “Tory economic failure”
“Too often, families who are saving for their first home but getting no closer to buying it feel like they’re doing something wrong.
“But the fact of the matter is that the Tories have inflicted households with a mortgage bombshell, let renters down and failed to build the homes we need.
“Millions are feeling the pain from this Tory economic failure.
“Labour has a plan to start fixing this crisis. We would stop households missing out on the mortgage support they need by making measures mandatory, we will give greater rights and protections to renters, and we will take the tough choices to get Britain building.”
Henry Jordan, Nationwide’s home commercial director, has said house prices were expected to fall 6.5% from the peak seen last August.
He told MPs on the Treasury committee:
“We’ve already seen some fall in house prices, roughly about 4% from their peak in August last year.
“We’d expect some further slight falls to around about 6.5%, would be our expected peak movement.”
But, he doesn’t believe this is having a material impact on the number of customers in negative equity, saying:
We have a very, very low exposure to negative equity currently, it’s 0.1% of our book. So we’re not seeing those movements in house prices really have any specific bearing.”
Updated
Andrew Asaam from Lloyds Banking Group told MPs house price falls could leave some mortgage holders in negative equity (owing more than their property is worth).
But MP also heard there is less risk than in previous financial crisis, as loan-to-value rates are relatively low.
Asaam told the Treasury committee this morning
“The place that this probably bites most is for first-time buyers, who will be typically at higher LTVs (loan to value rates).
“It’s a completely individual situation, but we still think owning a home for most people is better than renting.
“And therefore we want to keep products available at higher LTVs for first-time buyers.
“But we need to make sure that those first-time buyers are resilient, ie they can afford to stay in their homes through a two-year period where house prices might be falling, for example, and they are aware that they could end up in negative equity.”
Updated
Rising mortgage rates could reach 'tipping point', MPs hear
MPs on the Treasury committee have also been warned that mortgage rates could rise to a ‘tipping point’.
According to Henry Jordan, home commercial director at Nationwide, that could be between 6.25% and 6.5% for customers remortgaging their home loans.
We covered earlier that Jordan had explained that borrowers face an average increase of £235 per month as they move off existing fixed rate deals (at, say, 2.25%) onto new ones at around 5.5%.
Jordan told MPs that a customer who extends the term of their mortgage could cut the monthly increase to £134.
If they also move to an interest-only product, then they could move to a lower payment than they’re paying currently.
That remains true, Jordon says, until average remortgaging rates reach between 6.25% to 6.5%.
That might be a tipping point at which options such as interest only won’t be sufficient to offset the increase in payments that customer will see.
We flagged earlier that average two-year mortgage rates are now 6.66%, but a customer remortgaging with their lender will typically get a lower rate than that.
Bank of England may need to keep rates higher for longer, IMF says
Newsflash: The Bank of England may need to keep interest rates high for an extended period if inflation pressures persist, the International Monetary Fund’s directors have warned.
In a review of the UK economy, the IMF warns that the country faces a challenging economic outlook, despite being expected to avoid a recession.
The IMF warns that the UK’s long-run prosperity hinges on “ambitious reforms”.
And in a stern assessment of Britain’s economic progress, the Fund says that the UK, once a “strong performer”, has now lost economic momentum.
It explains:
Prior to the 2008 global financial crisis, the UK had been a strong performer among the Group of Seven countries. But this momentum was lost in the middle of the last decade. By 2022, real business investment was still slightly lower than in 2016 — in contrast to the 14 percent increase among other G7 economies.
Labor supply, which has just reached its pre-pandemic level, has also been weaker than peers. As in other advanced economies, productivity growth has been sluggish, reflecting a slower pace of innovation and technological diffusion.
Once a strong performer, the UK has lost economic momentum.
— IMF Europe Office (@IMFinEurope) July 11, 2023
How can the country revive growth potential and remain a global innovation leader? https://t.co/kVR89Lt9yN pic.twitter.com/yUY984gB3d
The IMF says it is critical to improve UK health outcomes, due to the long-term sickness that has driven the post-pandemic spike in inactivity.
And they say investor confidence would be boosted by a stable, long-term strategy to promote business investment – which could include a “permanent set of tax incentives that could potentially apply to investments other than plant and machinery”.
Chancellor Jeremy Hunt announced a temporary ‘full expensing’ tax break in March’s budget.
And, as it concludes its annual Article IV consultation with the UK, the IMF welcomed last month’s hike in interest rates to 5% – and warned that more may be needed.
The fund says:
Directors welcomed the Bank of England’s (BoE) policy response to arrest inflation pressures, including the 50 bps policy rate increase on June 22.
Given risks and uncertainty about the outlook and inflation persistence, Directors concurred that a continuous review of the pace and magnitude of monetary tightening is warranted. Should inflationary pressures show signs of further persistence, the policy rate may have to be raised further and would need to remain higher for longer to durably lower inflation and keep inflation expectations anchored.
The IMF suggests that the Bank of England might have to maintain higher interest rates for an extended period.
— Roensch Capital News (@RoenschNews) July 11, 2023
Back at the Treasury Committee:
Q: Are first-time buyers still trying to enter the housing market?
Andrew Asaam, homes director at Lloyds Banking Group, says the overall housing market is smaller this year than in 2021 and 2022, when the pandemic race-for-space was fuelling demand, as was the stamp duty holiday.
Its more similar to 2019, he says. Within that, the FTB market is smaller too.
People are either putting down a larger deposit, or buying a smaller property because affordability is tighter.
We won’t lent people as much now, with rates where they are, as we would historically.
Q: Are you seeing an impact on house prices?
Asaam points to the monthly house price index produced by its Halifax arm, which he says showed “a moderation in house prices” [the biggest fall in 12 years in June], while Lloyds forecast a 5% drop this year in its results.
Thames Water CEO Cathryn Ross then told the London Assembly Environment Committee that “progressive charging” for water bills would mean customers with the means to do so could pay more.
Ross expained, during this morning’s hearing:
“If we found a more progressive way of charging we would unlock the ability to charge those who can pay more”.
Defending privatisation, Ross compared it to mortgaging a home:
“We use finance to smooth the cost of those projects over a big period. We don’t get that money for free, when investors do give us that money they expect a return. They should get a reasonable level of return rather than an egregious level of return.
If our investors get the sort of return Ofwat says is fair, that’s absolutely fine with them. That would mean we would pay some dividends if we were getting that level of return.
We are not a profitable company. The annual results that we put out on Monday - we are making a loss of £30m after tax. This will be the sixth year they have not taken a dividend and they are putting a significant amount of money into the company. We are not at the position at the moment of having any profit to give back to shareholders.
“When water companies were privatised they were privatised with a clean balance sheet - no debt. One of the reasons they were privatised is it was known there was a huge amount of investment that was needed. You can pay for that investment as you go so the cost of all that goes on the customer bill today. Or you can spread the cost.
One of the reasons why the water companies were privatised in the way that they were was so the cost could be smoothed over time. We have taken a lot of debt, our total debt at the moment is £14bn. But you have to remember that our assets are worth £19bn. If we are taking on more debt to make our assets worth more it is like borrowing more to do an extension on your mortgaged house - it increases the value of your house.”
On whether nationalisation is feasible she said “I don’t really have a view” and said it was a matter for “government manifestos in the context of an election”.
Thames Water CEO quizzed over leakage failings
The interim CEO of Thames Water is being grilled right now by the London Assembly Environment Committee.
Cathryn Ross took over the unenviable role of running the beleagured water company after the abrupt departure of former CEO Sarah Bentley.
She told the committee that we take water for granted in this country, and the government’s Plan for Water is not ambitious enough.
She said:
“I don’t think at the moment the Plan for Water goes far enough. It’s a useful step forward but doesn’t go far enough. Yes there is more we need to do but we actually need to change our national conversation about water. We need to understand for example that London has the same rainfall as Jerusalem and we aren’t living in a wet country where we can take water for granted.”
Ross was also grilled on Thames Water’s woeful record on leaks by Environment Committee Chairwoman Leonie Cooper, who said:
“It’s an unthinkable quantity. How can we persuade people to use less water if Thames Water is losing 602m litres a day?”
The CEO added:
“You are quite right, I accept we are not where we need to be on leakage. I also completely understand, and we were seeing this last year, that when we were asking customers to use water wisely, this quite rightly was undermined by customers saying well we are doing our bit, why aren’t you doing your bit.”
But added she has “increased the number of [leak fixing] gangs out there” and Thames Water is “literally fixing a leak every seven and a half minutes, that hasn’t happened before”.
She added that a third of leaks are from holes in customers’ pipes rather than in Thames water’s pipes.
Bradley Fordham, mortgage director at Santander UK, says there are signs that some customers are looking to cancel subscriptions, as they focus their financial resources in the cost-of-living squeeze.
But there isn’t any particular sign of deterioration among unsecured borrowers, Fordham tells the Treasury committee.
Sunak: absolutely determined to stick to course on inflation
Over in Vilnius, prime minister Rishi Sunak has admitted inflation is “proving to be more persistent than people thought”.
Speaking to broadcasters as he travels to the NATO leaders summit, the Prime Minister acknowledged “things are difficult” for families across the country amid a rise in interest rates. But he insists that his course of action isn’t “wrong”.
Sunak told reporters:
“I know things are difficult for many families across the country. The UK is not alone in experiencing a rise in interest rates… the crucial thing that we have to do is bring inflation down.
“That’s how we’re going to ease the burden for families. That’s how we’re going to stop the rise in interest rates. And that’s why my priority is to halve inflation.
“Of course, that is proving to be more persistent than people thought, but that doesn’t mean the course of action is wrong. We’ve got to stick to it.”
"I am absolutely determined to stick to the course"
— Sky News (@SkyNews) July 11, 2023
Rishi Sunak MP says he "knows things are difficult", but the "crucial" thing to do is bring inflation down to ease the cost of living pressures many families are facing.https://t.co/u8Sd0bQ3HP
📺 Sky 501 and YouTube pic.twitter.com/sAm3kYePhG
Q: What concerns do you have that people who extend their terms or move to interest-only loans are only deferring the pain, and will end up paying more overall?
Henry Jordan, home commercial director at Nationwide, suggests that customers may be able to reduce their terms in future years, if interest rates come down again.
Q: How many mortgage prisoners do you have?
Andrew Asaam says Lloyds has no mortgage prisoners – all its customers can get a ‘front book rate’.
Updated
Q: What else can banks do to prevent house repossessions?
Andrew Asaam, homes director at Lloyds Banking Group, says Lloyds have been phoning fixed-rate customers who are potentially high risk to offer them the chance to extend loan terms or lock in a deal now.
Customers on variable-rates are told if they could save by moving to another product.
And for customers in financial difficulties, there are a range of tools to help with loan forebearance and keep them in their homes, and “only use repossession as a last resort”.
Q: So, what’s the point of the mortgage charter if you’re already doing most of the options already? Has the chancellor added anything substantive?
Andrew Asaam, Lloyd’s homes director, says it provides clarity and consistency for customers.
And with inflation still high, it’s a helpful intervention “as things progress”, Asaam adds.
Q: 85% of the market are covered by this voluntary charter – should the government reach out to the other 15% of lenders?
Santander’s Bradley Fordham suggests those 15% of the market could be specialist lenders, such as buy-to-let (which is not covered by the charter).
Nigel Terrington, CEO of Paragon Banking Group (which focuses on the BTL market) says he would happily sign the charter.
Mortgage charter impact 'remains to be seen'
Rushanara Ali, the Labour MP for Bethnal Green and Bow, asks lenders about the new rules agreed with the government.
Q: How much impact will the mortgage charter have?
[Reminder, the charted allows mortgage holders to switch to a interest-only plan for up to six months, extend their loan terms, or lock in a new deal six months in advance']
Henry Jordan, home commercial director at Nationwide, says it remains to be seen what effect the charter will have.
He says Nationwide saw a high take-up of payment holidays in Covid, with over 200,000 customers taking it up. He suspects take-up will be lower this time.
All the options in the mortgage charter are available today, Jordan points out. The key change is that there is no affordability check, including on moving to an interest-only loan, and no impact on a customer’s credit rating.
Currently, Jordan says, some customers are put off from moving to an interest-only deal because they are worried about the impact on their credit file – so just 100 customers per month currently choose it.
Ultimately, he points out, people will end up paying more interest if they extend their loan terms or move to an interest-only deal.
Jordan explains:
The message from me would be, only take these options if you need to becuase there will be a long-term cost.
Andrew Asaam says Lloyds welcomes the mortgage charter, as it gives customers a clear idea of what banks will offer them.
Skipton Building Society’s Charlotte Harrison agrees that it “remains to be seen” how many customers will take up the options in the mortgage charter.
Harrison also agrees that it will probably be fewer customers than took help early in the pandemic, as there is less uncertainty today.
Harrison tells MPs:
I would expct it to be lower, but we’re aso equally preparing for customer enquiries coming into us.
Bradley Fordham, mortgage director at Santander UK, reveals that fewer than 4% of customers with expiring mortgages are inquiring about mortgage charter-type help.
The UK’s relatively strong jobs market should help people handle higher mortgage rate, suggests Andrew Asaam, homes director at Lloyds Banking Group
Asaam tells the Treasury Committee:
Mortgage arrears have been highly correlated with unemployment.
Undoubtedly the cost of living crisis and inflation is really challenging.
But while unemployment is still low, that obviously provides people with options and [they are] finding different ways to manage their payments.
Santander: Higher rates will cause some customers financial difficulties
Rising mortgage rates mean homeowners will face a sharp increase in payments when their existing fixed mortgages expire, MPs hear.
Bradley Fordham, mortgage director at Santander UK, tells the Treasury Committee that, currently, mortgage rates are between 5.5% and 6.5%. At 6%, a customer coming off a 2.3% rate will face a £350 per month increase in mortgage payments.
Fordham says:
It’s significantly more in this environment.
Fordham backs up Skipton’s Charlotte Harrison’s warning that more customers will face financial stress, saying:
So you’d expect more customers to have some financial difficulty.
Updated
Skipton: expect more customers with financial stress
Q: Many people took out two-year mortgages during the stamp duty holiday in the pandemic, and soon need to remortgage. So, will the picture of your mortgage books have deteriorated in six months’ time?
Skipton Building Society’s Charlotte Harrison says her building society has stress-tested customers against a higher interest rate environment.
Most people will have paid off some of the capital they borrowed, so the amount the need to remortgage will have fallen.
Many of those homeowners have also benefitted from the double-digit house price growth in the pandemic, so the equity in their homes has risen, Harrison explains (although prices are now falling).
Harrison says:
What I expect to see over the next six months is that we will see more customers with financial stress. But I expect that to be relative to the to the market. And I think there are options available to those customers as well.
Skipton will explore what forbearance measures may be appropriate or not for strugging customers when their fixed-rate deals expire, she adds.
Updated
Q: What provisions will mortgage lenders take, due to changes in the quality of your mortgage books?
The lenders can’t give precise answers (partly because some are in ‘closed periods’ ahead of their next financial results).
Bradley Fordham, Santander’s mortgage director, explains that you’d expect provisions to rise “very slightly, in line with arrears”.
Charlotte Harrison, Interim CEO (Home Financing) at Skipton Building Society, echoes those comments. She says:
Provisioning will reflect the quality of our [mortgage] book.
Again, we’d expect a small increase in that.
Andrew Asaam, homes director at Lloyds Banking Group says provisioning will reflect the underlying quality of the loan (he can’t say more because Lloyd’s results are due in a fortnight).
Nationwide’s Henry Jordan can give a bit more detail. He says Nationwide has adjusted its models to reflect the pressures on mortgage affordability.
That increased Nationwide’s provisions against bad debt, reported in its latest financial results in April.
It’s provision coverage ratio is 0.14%, and skewed toward buy-to-let mortgages rather than residential loans.
Q: UK Finance data has shown a tick-up in mortgage arrears in the first quarter of this year, what have other lenders seen?
Andrew Asaam, homes director at Lloyds Banking Group, echoes the message from Nationwide. He says arrears are still very low in a historical context, and below pre-Covid 19 levels, although there has been a small uptick.
Skipton Building Society’s Charlotte Harrison says arrears at Skipton are flat year-on-year.
It’s a similar picture at Santander. Bradley Fordham, their mortgage director, tells MPs that despite a small-tick up in arrears they are still 20% below their pre-pandemic levels, and 70% below their 2009 levels after the financial crisis.
Fordham says Sandander customers moving off fixed-rate deals are seeing their average rates rise from 2.3% or 4.5%, meaning an average increase of over £200 per month in repayments.
Paragon Banking Group’s CEO Nigel Terrington, says Paragon’s arrears levels in lending to house-builders and small businesses are “very stable”.
Nationwide: No material increase in mortgage borrowers in arrears, yet
Treasury Committee chair Harriett Baldwin starts the hearing by asking mortgage providers about the sharp increase in interest rates this year, following a long period of low rates.
Q: What reaction are you seeing from the customers affected?
Henry Jordan, Nationwide’s home commercial director, says that the increase in mortgage rates means its customers face an average £235 per month increase in their payments when their current deals expire.
That’s roughly an increase of a third.
Jordan says Nationwide’s arrears are stable, with a one basis point [eg 1 percentage point] increase in customers who are three months in arrears on their repayments.
But there has been a larger increase in people in arrears for shorter time, particularly among buy-to-let customers.
Forebearance is actually lower than a year ago.
But generally, customer are taking action to protect themselves from higher mortgage rates, Jordan says.
He explains:
We have seen an increase in over-payments, and an increase in term extensions, but no material increase in arrears yet.
Treasury Committee questions mortgage providers
Over in parliament, MPs on the Treasury Committee are starting to question mortgage providers on rising rates, house prices and forbearance.
It’s a timely hearing, given average two-year fixed mortgage rates have just hit a 15-year high of 6.66%.
Here’s what to expect, from the committee:
The cross-party Committee of MPs will examine the current state of the mortgage market, including levels of mortgage stress, arrears and forbearance, and the outlook for the market in light of higher interest rates.
The Committee will question mortgage providers on consumer behaviour following recent rate rises, the impact on house prices and the wider housing market, and mortgage affordability and availability.
Government support schemes and the recently agreed ‘mortgage charter’ are also likely to be discussed, as are buy-to-let mortgages and the rental market, and the take-up of long-term fixed rate deals.
Here’s the panel:
Andrew Asaam, Homes Director, Lloyds Banking Group
Bradley Fordham, Mortgage Director, Santander UK
Charlotte Harrison, Interim CEO (Home Financing), Skipton Building Society
Henry Jordan, Home Commercial Director, Nationwide
Nigel Terrington, Chief Executive, Paragon Banking Group
Over in Germany, investor confidence has deteriorated.
The ZEW institute’s gauge of investor morals dropped to -14.7 this month, down from -8.5 in June, and weaked than expected.
Germany is currently in recession, and financial market experts predict “a further deterioration in the economic situation by year-end,” ZEW warns.
🇩🇪 ZEW: Economic sentiment keeps worsening in Germany, both in terms of expectations and current situation
— Nikolay Kolarov, CFA (@libertniko) July 11, 2023
➡️ Financial market experts predict a further deterioration in the economic situation by year-end, driven by the expectation of rising short-term rates in the eurozone &… pic.twitter.com/yTyswplupH
The increase in the average rate of a two-year fixed mortgage deal to 6.66% today casts a gloomy shadow over the possibility of homeownership for thousands of first-time buyers, says Amanda Aumonier, head of mortgage operations at brokers Better.co.uk
Aumonier adds:
“The rise amplifies the challenges faced by hopeful buyers, making the dream of owning a home increasingly unattainable as borrowing costs skyrocket and monthly repayments become overwhelming.
“Amidst this turmoil, existing homeowners who wish to remortgage find themselves trapped in a daunting maze of escalating interest rates, fuelling concerns about the financial strain they face”.
The Government is taking a “firm and robust approach to public pay settlements”, a Cabinet minister has said, after this morning’s data showed regular wages rose by a record 7.3% per year in the three months to May.
Asked whether wage growth drives up inflation, Work and Pensions Secretary Mel Stride told LBC radio:
“Domestic wage pressure is a key component of the stickiness of inflation, but that’s why it’s so important that the Government takes a relatively firm and robust approach to public pay settlements and there’s no way, unfortunately, that we can duck that because if those settlements are too high that will feed into those problems.
“We’ve got to make sure that those wage pressures are moderated to the extent we can.”
Pressed on whether the Government will accept the recommendations of the pay review bodies on public sector pay, Stride said:
“We have to be absolutely unwavering in our mission to get inflation down because that impoverishes us all, it’s a tax on everybody”.
"The more we have discussion in that space, the better."
— LBC (@LBC) July 11, 2023
Pensions Secretary @MelJStride has no issue with ex-PM Liz Truss coming out with a growth plan, he tells @NickFerrariLBC. pic.twitter.com/YbjKInx1Hl
However, raising pay in the public sector would not fuel a classic wage-price spiral, as state schools and hospitals would not fund it through higher prices.
Chart: How mortgage rates have climbed
Here’s a chart showing the surge in fixed-mortgage costs in recent weeks, driven up by signs that UK inflation is stubbornly higher than hoped (meaning higher interest rates).
People concerned about soaring mortgage rates should stay calm and speak to their lender or mortgage brokers if they have any issues, says Charlotte Nixon, mortgage and financial planning expert at Quilter:
The recent Mortgage Charter introduced by the government underlines that lenders should provide help in the first instance to strugging borrowers, she explains.
Nixon warns, though, that the UK is in a ‘difficult place’, as average two-year mortgage rates hit 15-year highs today.
She says:
“With the average two-year fixed mortgage rate hitting a devilish 6.66% according to Moneyfacts, many mortgage holders and potential house buyers must be wondering when the flames will die down and things start to look a bit more normal. Unfortunately, the UK is in a difficult place with its battle against inflation and as such interest rates are going to have to keep going up in the short-term. This is going to feed into the mortgage market and as such this is not the top of the peak – more pain is to come.
“The chaos in the mortgage market is hitting house prices and this is going to cause some uncertainty over the rest of the year as servicing costs become harder to manage and affordability is tested to its limits. For those who have a fixed rate deal ending in the next six months, the message is clear – act now or you could face exorbitant costs on the standard variable rate that you will default on to.
“For those looking to take out a mortgage now, there are options to consider to lessen the burden, though they do come with consequences. Taking out a mortgage with a longer term can help reduce your monthly payments, however, cost over the whole period will be greater. Not all lenders offer this length but if you use a mortgage adviser, they can help you search the market for the best deal. Although a longer term does mean that you will pay more in interest over the full term it does reduce your monthly outgoings. Once you come to the end of your deal you could opt to remortgage to a shorter term, so it doesn’t necessarily have to be forever.
Currently you go to zzz to then wake up to a new mortgage rate jolt. The avg 2y fixed mortgage is now 6.66% up from 6.63% yesterday. Avg 5y - 6.17% up from 6.13%. Meanwhile landlords are hit with an avg inc to 6.83% from 6.81% on a 2y & 6.62% from 6.60% on a 5y @Moneyfacts_couk pic.twitter.com/U67HGpPQY0
— Emma Fildes (@emmafildes) July 11, 2023
UK mortgage rates rise over 'mini-budget' peak
Newsflash: UK short-term fixed mortgage rates have risen above the levels seen last autumn after the chaotic mini-budget.
The average 2-year fixed residential mortgage rate has risen to 6.66% this morning, data provider Moneyfacts reports, up from 6.63% on Monday.
That takes the cost of two-year mortgages slightly above the peak of 6.65% set last autumn, when the borrowing market was rocked by Kwasi Kwarteng’s package of unfunded tax cuts.
It’s the highest rate for two-year fixed-rate mortgages since 2008, adding to the financial pain facing households who need to remortgage soon. They face paying many hundreds of pounds more each month, if they had previously fixed at low interest rates.
Fixed rate mortgages are priced off the yield (or interest rate) on UK government bonds. They hit their highest levels since the 2008 financial crisis last week, as investors anticipated further increases in interest rates to fight inflation.
Five year gilt yields have also joined two-year yields in pushing above their post mini-budget peak and both are now at their highest since mid-2008. pic.twitter.com/nmsm5WkSHb
— David Milliken (@david_milliken) July 6, 2023
Moneyfacts also reports that the average 5-year fixed residential mortgage rate has risen today to 6.17%, from 6.13% on Monday. That is the highest rate since last October.
Hundreds of mortgages have been pulled from the market again, as lenders rush to reprice deals. There are currently 4,344 residential mortgage products available, down from 4,631 on the previous working day.
Moneyfacts also reports that buy-to-let mortgage rates have risen. Here’s the details:
The average 2-year buy-to-let residential mortgage rate today is 6.83%, up from 6.81% on Monday
The average 5-year buy-to-let residential mortgage rate today is 6.62%, up from 6.60% on Monday
Reminder: MPs on the Treasury Committee will quiz mortgage lenders about the situation this morning….
🗣 This morning, we'll be questioning mortgage providers on the current state of the mortgage market in the UK.
— Treasury Committee (@CommonsTreasury) July 11, 2023
📺 Join us in the Grimond room @HouseofCommons, at 10.15am or watch the session live 👇https://t.co/bVbeFwwlem https://t.co/jQ4NnNaWeg
Updated
Analysts at ING agree that today’s strong wage growth could prompt the Bank of England to raise interest rates by half a percentage point next month, to 5.5%.
They say:
A few months ago it looked like UK wage growth had peaked. Now it is running at its fastest pace yet, and, depending on next week’s inflation figures, it could push the Bank of England into another 50bp rate hike in August
Today’s UK employment data is “a bit of an ‘anti-Goldilocks’ moment”, says Chris Beauchamp, chief market analyst at IG Group, with pay growth accelerating but unemployment also up.
Beauchamp explains:
Wages continue to rise at a strong pace but unemployment has ticked up too, a most unwelcome sight for the Bank of England (and indeed the government).
While this means the BoE will have to keep its foot to the floor in policy terms, it also shows that cracks are showing up in the edifice of UK plc.
The latest odds for interest rate increases
The money markets are indicating that the Bank of England is certain to raise borrowing costs again at its next meeting, on 3rd August.
Another large, half-point increase in interest rates, from 5% to 5.5%, is seen at a 70% chance (based in the price of interest rate swaps) while there is a 30% possibility of a smaller, quarter-point increase to 5.25%.
Bank rate is expected to hit 6% by November, and at least 6.25% by next spring.
Martin Beck, chief economic advisor to the EY ITEM Club, says there will be ‘intense’ pressure on the BoE to keep raising interest rates, following today’s employment data.
Beck explains:
“Headline (three-month average of the annual rate) total earnings growth increased to 6.9% in May, a 21-month high. Private sector regular pay rose 7.7% on the same basis, a record high outside the pandemic period and running well ahead of the Bank of England’s forecast for growth of 6.3% in Q2. The pressure on the MPC to continue increasing rates in August will be intense.
“The latest data for the labour market did at least offer signs of loosening on the quantities side. Employment continued to rise, increasing by 102,000 in the three months to May on the previous three-month period. But inactivity fell back, contributing to the workforce growing 1.1% year-on-year in the three months to May.
This took the economically active population virtually back to its pre-Covid size. The net effect of more people in work, but a bigger workforce, was to push the Labour Force Survey jobless rate up to 4%, from 3.8% previously.
Updated
Full story: Record UK pay growth adds to pressure for interest rate rise
Wages increased at a faster rate than expected in May, putting pressure on the Bank of England to push up the cost of borrowing at its next meeting in August, my colleague Phillip Inman writes.
Earnings growth hit 7.3%, driven by the strongest rise in private sector pay growth outside the pandemic period of 7.7%, the Office for National Statistics said.
City analysts had expected wage growth to ease to 7.1%. Pay growth was also revised up for the previous month to 7.3% from 7.2%.
Speaking at the Mansion House annual dinner in the City, the Bank of England governor, Andrew Bailey, and the chancellor, Jeremy Hunt, warned wage restraint would be needed to bring down high inflation.
The TUC is concerned that pay continues to lag behind inflation, despite the rise in basic wages in the last two months.
TUC General Secretary Paul Nowak says it would be “reckless” to push the UK into recession to cool inflation:
“The government must stop scapegoating workers for its failures. Wages are not driving inflation – they are not even keeping up with it.
“In the public sector and lower-paid private sector industries, pay is even further behind.
“The Bank of England’s own data shows that nominal pay gains are being driven by the very highest earners.
“Working families have suffered 15 years of falling living standards. Ministers shouldn’t be forcing households to become even poorer.
“We need a credible economic plan for boosting growth, jobs and pay.
“Setting the UK on course for another damaging recession would be reckless.”
IoD: higher interest rates are starting to feed through
The 13 increases in UK interest rates since December 2021 could now be hitting demand for workers, says Kitty Ussher, chief economist at the Institute of Directors.
Ussher explains:
“Wage costs remain very acute for employers across all sectors of the economy as businesses struggle to find the talent they need in a market that still has over two hundred thousand more vacancies than before the pandemic.
“However, there are also some hopeful signs, with the number of vacancies falling and more people coming out of inactivity back into the labour market.
“There is also a suggestion that recent interest rate rises are starting to feed through, with a reduction in payrolled employees and a slight increase in the historically low rate of unemployment.”
Bloomberg agrees that the Bank of England will not be pleased by today’s jobs report, saying:
UK wage growth held at a level that Bank of England Governor Andrew Bailey said is fueling inflation, maintaining pressure for higher interest rates.
Average weekly earnings excluding bonuses held at 7.3% in the three months through May after figures for the period through April were revised up, the Office for National Statistics said Tuesday.
It equaled the highest readings on record, last month and in mid-2021 when the figures were distorted by the pandemic. Economists had expected a slowdown to 7.1%.
BREAKING: UK wage growth holds at a level that Bank of England Governor Andrew Bailey said is driving inflation, maintaining pressure for higher interest rates https://t.co/H1H6V6nR6j pic.twitter.com/rbgRBW6qA1
— Bloomberg UK (@BloombergUK) July 11, 2023
Jonathan Ashworth MP, Labour’s Shadow Work and Pensions Secretary, says today’s labour market report is another “dismal” report card for the government:
“These figures are another dismal reflection of the Tories’ mismanagement of the economy over the last thirteen years.
“Britain is the only G7 country with a lower employment rate than before the pandemic and real wages have fallen yet again – just as more and more families feel the devastating impact of the Tory mortgage bombshell.
“Labour’s mission is to secure the highest sustained growth in the G7. We will create good jobs across every part of the country and our welfare reform and job support plan will get Britain working again.”
Government: Jobs market is strong
Chancellor of the Exchequer Jeremy Hunt has responded to today’s jobs report, saying:
“Our jobs market is strong with unemployment low by historical standards. But we still have around 1 million job vacancies, pushing up inflation even further.
Our labour market reforms - including expanding free childcare next year - will help to build the high wage, high growth, low inflation economy we all want to see.”
[Reminder, unemployment has risen to 4%, while there are fewer vacancies than last month.]
The minister for employment, Guy Opperman, says:
“It’s encouraging to see inactivity falling, vacancies dropping, and employment on the up. To get prices down and help make mortgages manageable, we must halve inflation and grow our economy.
To do that we are helping those who can, into work, and we recently increased the amount someone on Universal Credit can claim back for childcare to make working that bit easier.
“Our new Midlife MOT website is also helping everyone to future-proof their finances, whether that’s looking at options for work, reviewing their skills or understanding their pensions.”
Inactivity falls as more people return to jobs market
More people have returned to the UK labour market, as the cost of living squeeze continued to hit household finances.
The economic inactivity rate decreased by 0.4 percentage points to 20.8% in March to May 2023, the Office for National Statistics reports.
That means more people were either in work, or looking for a job.
The ONS explains:
The decrease in economic inactivity during the latest quarter was largely driven by those inactive for other reasons, those looking after family or home, and those who are retired.
The increases in the employment and unemployment rates and the decrease in the inactivity rate during the latest quarter were attributed to men.
Vacancies fall as companies cut back
UK companies reduced their vacancies for new staff in the last three months.
In April to June 2023, the estimated number of vacancies fell by 85,000 to 1,034,000.
This is the 12th consecutive fall in vacancies, as the jobs market returned to normal after the worker shortages following the Covid-19 pandemic.
There were 1,034,000 million job vacancies on average across April to June 2023.
— Office for National Statistics (ONS) (@ONS) July 11, 2023
This was down 85,000 on the previous 3 months.
➡️ https://t.co/XIrQqDcUYi pic.twitter.com/s9uSG5adK3
Over the last year, the total number of vacancies has fallen by 265,000. But, it is still 232,000 above pre-Covid-19 levels.
Pound hits 15-month high
Sterling is rallying this morning, following the news that UK pay growth was stronger than expected in the last quarter.
The pound has hit a 15-month high against the US dollar at $1.2913, the highest level since April 2022.
Traders are anticipating the Bank of England will continue hiking interest rates to cool the economy.
Not great.
— Ed Conway (@EdConwaySky) July 11, 2023
Economists had expected the annual rate of earnings ex bonuses to drop slightly. Instead it stayed where it was at 7.3%.
Another sign that inflation seems to be bedding itself in in the UK. Pound up a bit as markets anticipate even higher interest rates https://t.co/NxxbKIqVcB pic.twitter.com/i5vmScaY2R
UK unemployment rate hits 4%
Today’s labour market report also shows that the unemployment rate has risen to 4% in March-May, up from 3.8%.
The number of people unemployed for up to 12 months has risen in the quarter too.
More timely data shows that the number of people on company payrolls has dipped by 9,000 in June, to 30.0 million.
The number of employees on the payroll fell by 9,000 in June 2023.
— Office for National Statistics (ONS) (@ONS) July 11, 2023
It is now 1.027 million above its pre #COVID19 pandemic level.
➡ https://t.co/bcGgjjg6Mz pic.twitter.com/Z6ZB1ukdGX
ONS director of economic statistics Darren Morgan points out that real pay (adjusted for inflation) is still falling, saying:
“Total employment grew in the latest three months while the number of people actively looking for work also increased, both driven by men rejoining the labour market.
“Pay excluding bonuses has again risen at record levels in cash terms.
“Due to high inflation, however, the real value of weekly earnings are still falling, although now at its slowest rate since the end of 2021.”
Commenting on today’s labour market figures, ONS Director of Economic Statistics @DarrenM44 said: (1/3)
— Office for National Statistics (ONS) (@ONS) July 11, 2023
⬇️ pic.twitter.com/kepfQLCPjk
@DarrenM44 continued: (2/3)
— Office for National Statistics (ONS) (@ONS) July 11, 2023
⬇️ pic.twitter.com/uVjblSEOTh
@DarrenM44 concluded: (3/3)
— Office for National Statistics (ONS) (@ONS) July 11, 2023
⬇️ pic.twitter.com/I1JFzQHqDG
Private sector pay growth at record, as public sector lags
Public sector pay growth continues to lag behind the private sector, meaning public sector workers are suffering a greater blow from soaring inflation.
In March to May 2023, average regular pay growth for the private sector was 7.7%, which is the largest growth rate on record (outside of the pandemic period).
Public sector pay grew by 5.8%, the fastest growth rate since autumn 2001.
Introduction: UK wage growth hits record at 7.3%
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
UK wage growth has accelerated to a record high as workers continue to push for pay rises to protect them from soaring inflation.
New data just released this morning shows that average pay (excluding bonuses) rose by 7.3% year-on-year in March to May 2023, the joint-highest reading on record (matching a peak seen during Covid-19 lockdowns).
That’s stronger than expected. And the previous month’s data has been revised higher too, to show 7.3% wage growth in February-April too (up from 7.2%).
Economists had expected a small slowdown in pay growth today, to 7.1%, but this data suggests that wage inflation is more persistent – which will cause serious worries in the Bank of England, which fears a price-earnings spiral.
We're not going to see the @bankofengland relaxing: wage growth comes in at 7.3% (regular pay - 6.9% including bonuses) pic.twitter.com/qHvhfMAxAH
— Torsten Bell (@TorstenBell) July 11, 2023
Total pay, including bonuses, also strengthened – growing by 6.9% in the last quarter.
This means wages are still lagging behind inflation, though, which was recorded at 8,7% in April and May,
Growth in factory pay was the highest since records began in 2001, with pay growth of 7.8% in manufacturing. The finance and business services sector saw the largest regular growth rate at 9.0%.
This morning’s data comes just hours after Bank of England governor Andrew Bailey and chancellor Jeremy Hunt called for wage and price restraint to help the fight against inflation.
In his annual Mansion House dinner, Bailey told City bigwigs:
“Both price and wage increases at current rates are not consistent with the inflation target.”
Hunt took a similar line, saying the government would work with the Bank of England, and do “what is necessary for as long as necessary” to tackle inflation persistence and bring it down to the 2% target.
With public sector unions continuing to push for pay deals, Hunt warned:
That means taking responsible decisions on public finances, including public sector pay, because more borrowing is itself inflationary.
Hunt also agreed that firms should rein in their efforts to rebuild profit margins, saying:
I agree with the Governor that margin recovery benefits no one if it feeds inflation.
WATCH LIVE: Chancellor @Jeremy_Hunt delivers his Mansion House Speech https://t.co/oSPKXrghjP
— HM Treasury (@hmtreasury) July 10, 2023
Also coming up today
MPs will question UK mortgage providers this morning about the surge in borrowing costs, which is squeezing the affordability and availability of home loans, and the impact on house prices.
The Treasury Committee will hear from Lloyds Banking Group, Santander UK, Skipton Building Society, Nationwide and Paragon Banking Group about the current state of the mortgage market - including levels of mortgage stress, arrears and forbearance - and the outlook for the market in light of higher interest rates.
Yesterday, the average 2-year fixed residential mortgage rate jumped to 6.63%, up from 6.54% on Friday, and close to the highs last autumn after the “mini-budget”, data provider Moneyfacts reported.
Britain’s retailers have recorded a sharp rise in spending in June as hot weather prompted consumers to buy summer clothing and outdoor goods, despite growing pressure on budgets from the cost of living crisis.
The agenda
7am BST: UK labour market report
7am BST: German inflation report for June (final reading)
10am BST: ZEW survey of economic confidence in Germany
10am BST: OECD to release its annual Employment Outlook report
10.15am BST: Treasury Committee to question mortgage providers on rising rates, house prices and forbearance
1pm BST: Brazil’s inflation report for June
Updated
