Investment Management Blog - Montague Capital

We thought rates were coming down……

Sometimes it is legitimate to question the purpose and effectiveness of interest rate cuts.  Yesterday, despite what the Bank of England has delivered following the start of the credit crunch, Nationwide increased its mortgage rate to new borrowers by 0.2%.  Nationwide made a very poor fist of explaining to the media why 0.5% off base rate should translate into higher, not lower, monthly mortgage interest payments to the lucky few still able to get a mortgage.  That was in fact the first point: there are fewer mortgage offers around. 

What that really means is……

Nationwide will ruthlessly exploit the fact that it is a relatively bigger fish in an evaporating pool (February’s new mortgage approvals fell 33% y/y) and gouge accordingly.  Next, it’s getting more expensive to raise money in the wholesale money markets.  Sure, but Nationwide gets a big chunk of its funds from depositors and has been more than happy to pass interest cuts on to them, so that part of its funding is getting cheaper.  Nationwide’s focus on “prudent and responsible lending” and a desire to avoid becoming “overly competitive” looks much more like simply making as much money as it possibly can out of the situation.  Interest rate cuts aren’t intended as a profit generating exercise for the banks.  With the gamble being taken on the UK’s inflation prospects, UK plc deserves far more of a direct positive impact on the real economy and real people.  We do not have the scope to follow the US Fed and cut rates to near-zero in the vain hope that some of the proceeds will filter down to households rather than fill the holes banks and building societies deliberately put into their own balance sheets.  Nationwide has not done the financial services sector a great favour with this behaviour.  In time questions will be asked.  It does nothing to reduce the threat of regulation to give top-level monetary policy a chance of achieving its intended objectives.  However, on the positive side, Nationwide’s move does help by continuing to deflate the notion that unlimited funds will always be available at artificially low prices to pump up house prices that have already parted company with reality.  Mortgage broker John Charcol estimates that 2.75m UK mortgages will be seeing highly monthly costs when they re-set during 2008.  As their theoretical house values take another hit, we can be certain that these poor souls will be delighted with Nationwide’s “improved customer service”.