HOUSEHOLDS face a punishing 80 per cent jump in monthly mortgage costs as government bonds have leapt to the highest level since the 2008 financial crisis on fears the Bank will hike rates even further.
Sun Business explains what’s going.
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What are gilts?
Government bonds are like the oil of the financial system engine — essential for making money flow.
The trading of bonds, known as gilts, are used to price mortgages and loans.
When interest rates go up, gilt prices go down and gilt yields go up.
Their trading is a big indicator for market predictions on interest rates end up.
Bond yields are the amount an investor gets for owning the debt issued by the Government.
When a bond price falls, the yield rises as investors want a better return for their weaker asset.
Why are gilts back in the news?
Kwasi Kwarteng and Liz Truss’s unfunded mini Budget last year caused a meltdown and government bond prices plummeted, causing mortgage costs to surge and the Bank of England to intervene.
Calm was restored in the spring but now two-year bond yields have jumped even higher than the levels last October on fears that the Bank will have to raise interest rates to around 5.76.
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As a result, the yield on a two-year government bond has leapt to 5.7 per cent, above last October’s 5.6 per cent and back to levels last seen at the peak of the 2008 financial crisis.
It is a concern because it impacts how mortgages will be priced and means the Government will have more expensive costs on its £137billion of borrowing — leaving less in the coffers to fund tax cuts.
Why do people think interest rates will rise again?
The Bank of England is trying to bring down inflation by raising interest rates, because it typically encourages people to save.
UK inflation at 8.7 per cent is still four times higher than the Bank’s 2 per cent target.
The Bank is also worried that wage increases will lead to inflation becoming even stickier as companies cover higher staff costs by jacking up product prices.
What will higher rates mean for me?
The market expects the Bank to raise the rate from 4.5 per cent to 5 per cent on June 22 and up to 5.76 per cent next year, pushing up borrowing and mortgage costs.
This means the average variable mortgage rate will rise to as high as 8.77 per cent.
For a household on a two-year, £100,000 fixed mortgage who remortgage when rates hit 5.75 per cent, monthly costs will rocket 80 per cent from £391 per month in 2021 to £707.
CENTRICA HITS GAS ON GAINS
THE owner of British Gas expects to make significantly higher profits from its household supply business after regulators allowed it to reclaim some of its losses from customers who couldn’t pay their bills during lockdowns.
Centrica boss Chris O’Shea claimed that banning forced installations of pre-payment meters would lead to higher bills.
British Gas was forced to apologise this year after its debt agents broke into vulnerable customers’ homes to force-fit meters.
Mr O’Shea said that if bad debts increased, Ofgem would raise the industry’s price floor.
He added that if people were not paying for their energy, the cost would be passed on to other households.
Just 6.8 per cent of investors rebelled against Mr O’Shea’s £4.5million pay packet after Centrica’s profits tripled last year to a record £3.3billion.
GOVERNOR’S ADMISSION
BANK of England governor Andrew Bailey admitted that rate setters were wrong to forecast unemployment rising after the pandemic.
Grilled by the Lords’ economic committee, he admitted that inflation was “taking a lot longer than expected to come down” despite the Bank hitting homeowners with 12 rate rises in a row already.
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Mr Bailey said there were “lessons to be learned” in reacting too slowly on rising inflation in 2021 as pandemic restrictions were eased.
However, he maintained that critics enjoyed the benefit of hindsight and said the Bank could not have ever predicted the series of shocks from the pandemic, supply chain snarls in China and the war in Ukraine.
TURNOUT MARS CBI
THE CBI got the backing of less than a third of its members in last week’s confidence vote.
The poll saw 371 votes cast, with 93 per cent in favour — but low turnout called the lobby group’s “strong mandate” for survival into question.
The scandal-hit CBI has always claimed it spoke on behalf of 190,000 businesses.
But new boss Rain Newton-Smith told MPs the organisation only had 1,200 direct members, 120 of which are other trade groups.
