Here we are in the second half of 2023 and the news is all about interest rates.  Base rates, mortgage rates, savings rates, fixed rates, margins on rates; the focus on rates is intense and likely to stay that way all through this year.

Partly this is because of inflation and the belief that to bring inflation under control you keep raising interest rates until they bite hard enough; partly this is because we now have the looming spectre of a fall (crash?) in property prices as mortgage rates price some first time buyers out of the market and see the exit of the more highly leveraged landlords; partly this is because there is a feeling that banks are profiting from this by widening the gap between what they charge and what they pay, not passing on rates rises to savers as quickly as they do borrowers.

The basic principle is that higher rates mean less spending in the economy because people borrow less and save more.  However, with the unemployment rate low and employment rate high, partly due to an increase in the economically inactive, there is a strong possibility that we will simply see higher wage demands having to be met by employers desperate to retain staff, then passed on in higher prices for the goods they produce.  If that is the case, then it has been suggested that the only way that spending is held back is when the cost of debt carried by those companies intervenes and we have a swathe of insolvencies leading to a rise in unemployment.  Now there’s a scary thought!

Over in social media world meanwhile what is happening to mortgage rates is opening up an age divide.

In the red corner we have the Avocado generation (to borrow a cliched criticism) : people who bought relatively recently with mortgages on 2-year fixed rates taken out when these were below 2%.  With 2-year fixes now over 5.5%, many may be looking at their interest rate trebling and their house value falling. Some are first time buyers within the last couple of years, others seem to be on their third or fourth very low fixed rate since the credit crunch believing that this was “the new norm” and now looking around to see who will rescue them, envious of how easy they feel those who bought in the 80s had it. 

In the blue corner we have the Winwees (to borrow a phrase from the post-Zimbabwean independence period) : people who bought back in those periods in the late 70s or early 90s when rates were well above 10% and moving with the rapidity of our dogs hearing the rustle of a crisp packet in another room.  Contemptuous of a soft generation that don’t know what a high interest rate is, they forget the advantage that a lower income to house price ratio provided.

A strange divide since many of the former will be children or even grandchildren of the latter, which must make for interesting discussions at family meals, and one which has to be an unintended consequence of fiscal policy which cannot be healthy for society.  The issues are far more nuanced than either side allow and this is probably an argument that both sides could do with stopping.

Meanwhile on Radio 4 last week I heard a senior banker from a well known High Street bank explaining how, with their 2-year mortgage rate around 5% and their 2-year savings rate also around 5%, they could not be profiting from the continuing rises in base rates.  Having had a quick check, for a 60% Loan-to-Value their 2-year mortgage rate appears to be 5.94% (with no fee) and their 2-year fixed term savings rate 4.45%.  One could argue that both are around 5% however, the word “around” has to do some heavy lifting in both these cases and the end result is a feeling that maybe said banker was not being as honest as he could have been.

The only thing I believe to be certain is that the interest rate saga is a long way from being played out and the risks to both economy and society may be higher than most think.  The light may be shining on that perennial and very British topic of conversation, house prices, but the impact is potentially so much wider than that.  At some point in the future we may even look back on 2023 as the year that led to the removal of tax breaks on your main residence.