HAMISH MCRAE: Troubling truth behind 0.99% loans

HAMISH MCRAE: If inflation becomes embedded, 0.99% mortgages will seem an anomaly, a bit like the double-digit rates some of us had to pay years ago

If you can get a mortgage from HSBC at 0.99 per cent what does that say about interest rates and inflation in the future? That the fears of a surge in inflation are overdone? That rates will stay at rock-bottom levels even if inflation climbs? That the pandemic is not pushing up prices as much as many fear? Or what? 

Several points. First, this deal and all the similar ones trotted out from other lenders are a simple commercial response to the fact that the banks are flooded with cash at zero – or near-zero – interest rates. 

They have to do something with that money. So they make a very safe loan – you have to have a lot of equity in the property and the fix is only for two years – charge a hefty fee, and that gives them a decent profit. 

Upward trend: If you can get a mortgage from HSBC at 0.99 per cent what does that say about interest rates and inflation in the future?

Next, the two-year horizon is important. Last week, the US Federal Reserve indicated that it expected no rise in interest rates this year, maybe one next year and probably two by the end of 2023. 

That is America, not Britain, but what happens to dollar rates inevitably affects sterling rates. The markets took the news as the Fed being likely to raise rates a bit sooner than they expected, hence the rise in the dollar which has helped push the pound back below $1.40. 

The implication for the UK is that while the first rise in rates is possible next year, more likely it will come in 2023. So that would be two more years of ultra-cheap money – hence the two-year fix on these mortgages. 

This says nothing about inflation here or in the US. Both central banks have similar mandates to try to have consumer price inflation at around 2 per cent. 

For some time it has been below that level on both sides of the Atlantic. But now it is rising and the general message is that the central banks will be prepared to tolerate some overshooting for a while, at least until the fallout from the pandemic settles down. 

That makes sense. The uncertainties are huge and as they say in Yorkshire, when in doubt, do nowt. But there is going to be some burst of inflation and what would frighten the central banks would be for that to become embedded. 

At the moment UK inflation expectations are stable. The Bank of England does a survey on this and people on average expect inflation to be 2.4 per cent over the next 12 months and 1.9 per cent for the year beyond. That sounds pretty sensible: the consumer price index is up 2.1 per cent in the past year. 

But there are awkward signs ahead. One is what is happening to wages. There are all these stories of shortages of bar and hotel staff; the builders and market gardeners are saying they have to pay more to get people. 

Average earnings are up 5.6 per cent on the year, and there are suggestions that by the autumn they could be up by 8 per cent year-on-year. 

There are distortions here as a result of the pandemic as wages were depressed a year ago. The Office for National Statistics thinks the underlying increase is more like 3 per cent. 

But labour shortages could push that number up, and in any case rising wages create a problem for the Chancellor, who is committed to the ‘triple lock’ on state pensions. 

They have to go up by 2.5 per cent, or the rate of inflation, or the rate of average earnings, whichever is highest. Rishi Sunak was rather uncomfortable about this when challenged in a TV interview with Andrew Neil last week. Rising wages drive up domestic costs but we can also import inflation from the rest of the world. To some extent that is happening. 

The recovery in the oil price means that the price of petrol is now the highest for two years. Car manufacturers are struggling with a shortage (and hence an increase in the price) of computer chips. Copper, a key element in the drive for renewable sources of energy, was at a seven-year peak last month. Ocean freight costs have doubled in the past year. 

It takes a while for all these costs to filter through into prices in the shops, but eventually they have to. So far things are under control and fingers crossed they may remain so. 

But if inflation becomes embedded, then those 0.99 per cent mortgages will seem a strange historical anomaly, a bit like the double-digit rates some of us had to pay all those years ago.

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