Inflation

Today has been another one of those days that comes each month where UK inflation has risen again, poor old Mervyn King has had to write a letter to George Osbourne explaining it again, with the associated speculation that interest rates must rise soon to curb this inflation. There are two questions that occur to me about this that don’t seem to be mentioned on the news:

1. Who set the target at 2% anyway?

The answer would seem to be Gordon Brown in 2003. That was 8 years ago, so perhaps the target rate is due a review, in light, for example that VAT, fuel duty and other duties are now higher than then, as well as global commodities such as oil. It was also apparently changed partly to make joining the Euro easier in future.  Surely the coalition could blame this ridiculously low target inflation rate mess on the previous government, just as they do most other things on a daily basis, while adding a bit of ‘we’ll never join the Euro anyway’ rhetoric and get this target raised. A higher inflation target means that there is not so much of a ‘problem’ with inflation, which seems now to have just recovered its trajectory from before the recession.

2. Would raising interest rates have any effect on inflation anyway?

Mervyn King’s reasons for the latest rises were the VAT rise, rising global commodity prices and the weakness of the Pound. None of these would seem to be affected by a UK interest rate rise, which would give marginally better rates to savers, but also reduce the disposable income of most people on a mortgage, who are already being squeezed by inflation, tax rises, and possibly insufficient wage rises (including me). With growth negative, people potentially saving more and spending less due to higher interest rates wouldn’t seem to be a good idea.

Perhaps the big question really is whether the idea that changing interest rates to control inflation within a country is actually valid any more in today’s global world where so many factors that may influence inflation are outside of a country’s control.

Why I have a better mortgage deal than I thought, but am annoyed about it

Key Facts: If you have a mortgage deal with Nationwide that you took out before 29th April 2009, it will revert to Base Mortgage Rate (BMR) at 2.50% when your deal ends. Check with Nationwide if you are not sure. If you have a deal ending with anybody else, make sure you know the rate that it will revert to before making any other arrangements.

I’ve been dreading the 1st April 2010 for the last couple of years as that is when the tracker deal on the mortgage that I have had with Nationwide for the last 5 years runs out and potentially my mortgage payments go through the roof. Thankfully the UK base rate has remained low, but I have been looking around for other deals as I was expecting the rate to go up to 3.99%  (1.75% increase, about £60 per month). I have found out today, that in fact it will go up to 2.50% (0.26% increase,about £7 per month).

So why I am I annoyed about this? Fundamentally, because I have made arrangements to move my mortgage elsewhere at a rate of 2.99%, which I thought was a better deal, and which I am now having to cancel as it is actually worse than leaving my mortgage as it was. What I didn’t realise was that there are two mortgage rates at Nationwide. The Standard Mortgage Rate (SMR) is 3.99%, but the Base Mortgage Rate (BMR) is 2.50% (strictly no more than 2% above the Bank of England base rate). My mortgage reverts to the BMR, as it was taken out before 29th April 2009. Any new mortgages since then revert to the SMR.

Now I am annoyed at myself for not noticing this distinction, but I did not notice it because it was not made very clear. Look at this page, which I probably went into and skimmed the chat at the top and clicked on the ‘View Mortgage Rates’ button. The problem is that the page for viewing mortgage rates does not mention the BMR at all, but the ‘Please Note…’ part at the top of this page does. A letter I received in January is similar. It tells me to look at their switcher deals, in an enclosed leaflet that does not mention the BMR, and the BMR is only mentioned in the 6th paragraph almost at the bottom of the first page. In neither case is the 2.50% figure displayed anywhere, only that the BMR cannot be 2% more than the standard base rate. So if I had read the text more carefully and done the maths, I would have realised that the 2.50% figure was what I should expect, but I didn’t. If I had got in touch with someone from Nationwide, they would presumably have explained this as well, but I didn’t.

Now I realise that this isn’t quite as bad as the plans being ‘On Display’ in the Hitchhiker’s guide to the Galaxy, but it is still not really clear either. Basically, Nationwide  changed their rules last year. I may have even read about this at time, but if I did I forgot about it, and Nationwide presumably don’t want to draw attention to the fact that their rates are now worse for new customers and that they have this two-tier structure.. I can understand that on the website, but on the letter a simple statement at the top stating that it will revert to BMR, and saying it was currently 2.50% would have saved me wasting my time and that of other lenders looking for other deals. Nationwide are still competitive with other mortgage lenders on standard rates as far as I can see, though none of their deals would save me any money, or so I thought, which is why I looked elsewhere for a deal.

Why retail and investment banking need to be split

Today RBS announced a loss of £3.6 bn while paying bonuses to a few employees totalling £1.3 bn.  The loss was down to bad debts, and the bulk of their profits made before this is accounted for came from investment banking (5.7 bn of 8.3 bn).  The results were better than expected, and so good, you may say. I say no, and I will now explain why.

I have been recently having a lot of work done on my house, mainly a new kitchen and bathroom. I have taken out a loan with my bank to cover a lot of the cost. The bank is not lending me this for nothing. They are charging me interest and making a profit from it. However, as well as improving my house, this is providing direct and indirect benefits. I am employing a local firm and there is one person I am providing a few week’s worth of work for along with odd days of work for electricians, plasterers and other specialists. These people are in turn buying kitchen units, bathroom units,  and other items that are supporting often British companies and indirectly jobs. Thus as well as turning a profit for the bank, this is helping indirectly potentially a wide number of companies and people. The same could be true of business lending, which may directly provide jobs, and then indirectly help suppliers.

Now I’m no expert on investment banking but it seems to be me it is basically ‘speculate to accumulate’, buy something now (possibly with borrowed money) and then sell it later at a higher price, probably in increasing clever and ingenious ways. However, such behaviour has no impact on the UK as a whole, it just seems a bit of a private club for printing money, unless it goes wrong of course. Now I can understand the appeal of banks of what is effectively easy money, but I do not think that I as a UK taxpayer should be guaranteeing this in any way shape or form. While investment banking is mixed up with retail banking, this is very difficult to avoid guaranteeing. Now you could argue all these millionaire bonus recipients today are going to spend some of that money and thus help the wider economy, but I suspect the effect is trivial compared to the wider effect of lending money to many people spending money like I have recently.

So my proposal is this:

• Banks must be split into separate retail and investment banks.  I don’t mind if they share the same parent company but they must be financially independent. In other words, the investment bank cannot take money from the retail bank or vice versa and they must report separately.
• The taxpayer should only guarantee the retail banking side. If the investment bank takes too many risks that don’t work out, and they go bust, so be it. The effects on wider UK society of this are likely to be minimal. If the investment bankers want the ‘market rate’ I keep hearing about, they must be prepared to suffer the down side of the market, rather than expect to be propped up by the State.
• The Banks should be obliged to provide lending and other facilities to retail customers, and in ways that can be enforced, unlike the current situation. Their role should be be regulated as providers of finance to the wider economy, rather than just profit maximisers in their own right.

I don’t think the banker’s have learnt anything in the last few years, and Banks desperate to turn some form of profits seem to turning more to their investment arms for profits, while not lending as much on the retail side as they could. The result could easily be another crash in a few years, before we the taxpayer have paid off the last crash, and the country can’t afford this. We need to split retail and investment banks to make sure that taxpayer help in such situations is in protecting businesses and consumers, not a minority of investment bankers.