Interest rates remain high in the UK, whilst US rates are coming down quickly. As a result the pound has surged to $2.10, putting more pressure on anyone trying to export from the UK into the dollar area.
The US authorities have taken the credit crunch and the mortgage crisis seriously. They think they have a battle on their hands to keep the US economy moving ahead, despite the most recent growth figures coming in at a lively 3.9%. They understand that the future is going to be much tougher than the immediate past. Many of the mortgages lent to people over the last couple of years were based on a initial teaser? or soft interest rate. After a defined period the interest rate is pushed up, making it more likely more people will be unable to pay and increasing the number of defaults. Many of these mortgage increases will happen over the next few months on the more recent loans. US banks are keen to keep more cash and lend less money, and they are coming forward with substantial write-downs and losses, recognising the problems they are already experiencing from so-called sub prime? or poor mortgages.
Meanwhile the UK authorities look on as if none of this applied over here. They seem oblivious to the damage the run on Northern Rock did. They ignore the way inflation has fallen like a stone to 1.8%, below their target. UK banks have still not made statements setting out in detail what if any impact there is from the sub prime crisis on their balance sheet and profits. The Monetary Policy Committee meets, draws its salary and sets its interest rate, but market rates are above its rates and no-one seems to think they should try to sort out this gap. UK banks, just like US ones, are fighting to improve their balance sheets and increase their cash resources. It means here, as in the US, money is going to be tighter. That means less inflation, not more.
The UK authorities seem to think that because oil and petrol prices have gone up, and food is also getting dearer, an inflation problem is just around the corner so they had better keep rates up. The sad truth is that is the UK government which is doing most to raise the inflation rate in this country. It was the tax hike on petrol and diesel which was the killer, as tax represents around two thirds of the pump price so we know who to blame for our sky high petrol prices. Council tax has gone up too much, and mortgage rates have risen substantially in the last couple of years, thanks to the actions of the UK monetary authorities. The UK could afford lower interest rates, if only the public sector did a better job of curbing its impact on our inflation rate.
Commercial property prices are falling in the UK. Residential house prices are falling in the US. UK house prices have fallen gently over the last couple of months the market seems to have held up better partly because people have been put off trying to sell their homes by the advent of the much disliked Home Information Packs. US business is now able to increase its exports as a result of the falling dollar. UK business is seeing more competition emerge from overseas, and some British businesses are taking their jobs abroad as a result of the current combination of relatively high interest rates and a strong pound against the dollar. Maybe one day the Bank of England and the Chancellor will see the need to do something over here. In the meantime the UK authorities behave as if Northern Rock had not happened, and decide to flight the last war against inflation rather than the next one against a downturn.
It’s time to be cautious. The banking problems are not over, the Bank of England does not want to cut rates, and the US as well as Asia is much more competitive.