D-Day for the central banks

This month marks the 80th Anniversary of the D-Day invasion where we commemorate the bravery and sacrifice of those who fought during a pivotal moment in World War II.

I have fond memories of watching and taking part in D-Day celebrations over the years, seeing people, old and young coming together to give thanks and celebrate those who gave so much to secure our freedom. Perhaps my most enduring memory was the 75th anniversary in 2019 when Sergeant Tom Rice re-created a parachute jump he made 75 years before by leaping from a C47 in memory of the 101st Airbourne Division of which he was the sole survivor. He was 97 at the time and sadly, but somewhat poetically, died a few years later aged 101 (a final shout out to his fallen friends).

Warfare tactics have shifted significantly since the 1940s and the journey Sergeant Tom took would unlikely take place today. The birth and rise of nuclear weapons in the 1950s brought to life by Christopher Nolan’s Oppenheimer preceded a multi-decade arms race in the form of the cold war that peaked with the Cuban missile crisis in 1962. That landscape has shifted again recently to incorporate the challenges of terrorism, proxy wars, cyber-warfare, drones, economic war/espionage and AI – all of which have relegated conventional warfare wisdom to being virtually obsolete should we face the threat of another world war. 

The same is true of the economic landscape, with central banks also fighting battles across the world, constantly seeking a Goldilocks economy but battling increasingly unpredictable and evolving bears in the process. Yet economic policy has failed to adapt and take into consideration shifting demographic landscapes and globalisation. 

When the Bank of England first produced its inflation report for the Government in 1993, the percentage of homeowners with mortgages in the UK was around 43 per cent, a figure which remained relatively unchanged when the Bank was granted operational independence over monetary policy in 1997. The Bank of England now had free rein to set rates to target inflation, originally at 2.5 per cent and more recently at 2 per cent. In general terms raising rates would cool the economy and lowering them would do the opposite.

Of course, in 2009/2010 during the global financial crisis lowering rates was insufficient and central banks embarked upon an unprecedented quantitative easing programme. This staved off a widescale collapse of global markets but did little to stoke inflation, at least until 2021 when the three bears reared their heads once more, morphing into the form of a global pandemic disrupting supply chains and lighting the inflationary touch paper on manufacturing goods. 

House prices had already spiked, driven by a post-pandemic race for space and when Russia invaded Ukraine, energy prices were sucked up into the inflationary maelstrom that followed. Liz Truss did little to douse the raging fires and it was under her watchful eye in the summer of 2022 when the UK gilt and bond market hit crisis point, with mortgage rates briefly spiking above 7 per cent. The pivot had completed so quickly that it would have wrong-footed Michael Jordan.

Many people ask why such a dramatic rise in rates hasn’t transpired into a house-price crash, and there are many reasons. Prime central London cash buyers aside, fixed-rate mortgages and borrowers locking into lower rates for longer have helped, as have swelling cash deposits saved during Covid. The mortgage market review has also stress-tested mortgages for high rates since 2014, but most interesting to me and not as widely publicised is that unlike 1993, the percentage of homeowners with mortgages has fallen to a mere 28 per cent as of last year. This is a phenomenal statistic and one that is regularly overlooked. It essentially means a much larger proportion of people are not only unaffected by higher rates but are actually better off with them. I hasten to add I am not one of them.

With this in mind, and despite affordability, higher rates and stamp duty, it plants the UK housing market on incredibly solid ground going forward into the election. It is virtually certain we will have a new government, and this will inevitably mean change. VAT on school fees and non-domiciled tax changes seem all but given and this will affect the ebb and flow of micro markets in different ways but it would take something much bigger to rock the foundation of the housing market as it stands. Also, I expect this centre-left government may well be more benign than people think. In any event it’s a welcome sight compared with across the channel where Far Right politics are sweeping through the European Parliament. Coming as this does as we celebrate celebrate D-Day, it should bring shame on many of those politicians in Europe.

But whatever happens in the elections, both domestic and abroad, there is an argument to question whether the conventional weaponry rolled out by central banks can ever be as effective as it was in yesteryear.