FEAR OF FINANCE

Click to follow
The Independent Online
Poor old Eddie must be wondering if he was wise to sign up for the Ken and Eddie show. Eddie was meant to be the brains of the team when the double act was set up two years ago to assure the world that controlling inflation would take precedence over political knockabout in future. After fluffing his lines last year, Eddie is now looking more and more like the stooge, while Ken is increasingly able to write the scripts to suit his political objectives.

He has been able to ignore new evidence that consumer spending is already picking up strongly, because this can be explained by the effects of income tax cuts announced last November to take effect next month - and by the sudden release of cash locked up in Tessa accounts for the past five years. The vast bulk has been reinvested but even 5 per cent of the money released would add pounds 1 billion to consumer spending.

The first tentative signs that the housing market is picking up will not have caused Ken any worries either. His political instincts will tell him that without a bit of feel-good between now and the election the Tories are dead and buried.

But there is a genuine economic case for lower interest rates as well. Research published this week by Panmure Gordon shows that over the last 20 years an inverted graph of interest rates matches the performance of the economy - as measured by the index of longer leading indicators - remarkably well, with the exception of election year in 1992, and again in 1996 when the economic outlook has plunged in spite of falling interest rates. The outlook is now as bad as it was when base rates were at 15 per cent during the '80s.

The truth is that inflation is still weak, and real interest rates, after deducting the rate of inflation, are actually rather high.

Even today real base rates are over 3 per cent and real borrowing costs are well above base rate. Personal loans and especially credit card rates are particularly expensive. Better still the rest of the world is on a similar course, and the UK is not inviting an attack on sterling by going against worldwide trends.

Yesterday's cut was not dramatic, but tiny cuts suit the Chancellor well and the latest is unlikely to be the last. There could well be another two or three before the election. The Halifax has led the way for further cuts in mortgage rates, intensifying the war between the public companies and the mutuals still further. But banks and building societies still have fixed costs to cover and savings rates are also set to fall.

We can expect the cost of short-term discounted mortgages to dwindle towards vanishing point, but savers must expect the returns on easy access accounts for small sums to drop to derisory levels.

Investors who chose fixed rate Tessas rather than variable rates when they started renewing their accounts in January will certainly be giving themselves a pat on the back, while borrowers who took out fixed rate mortgages over the last two years must be kicking themselves, and their financial advisers as well.

The Portman's decision to knock a full point off its fixed rate loans is an attempt to recapture the initiative which others will surely follow.

Looking for credit card or current account deals? Search here

Comments