According to the newspaper, the reserve bank governor is concerned that the increase “could leave homeowners scrambling to liquidate investments to cover mortgage repayments”.
However, to my mind, the question is less about the impact of a 25 basis point increase on UK mortgage owners, and more about liquidity in general and the growing importance of the asset management sector more broadly within the financial system.
First the mortgage point, while it is true that, with mortgage rates at around 2.5%, a 25 basis point hike represents a much larger percentage increase than it would do were rates higher, one could argue that, at such levels, of more importance than the actual level of repayment is whether or not those repaying such mortgages remain employed. And, on that metric, the UK labour market statistics look pretty good.
For Stephen Bell, director of global macro at BMO, the impact of a one 25 basis point hike likely to be fairly minor in absolute terms to the mortgage market. What is far more important, he argues, is the reasoning behind the hike. “If it reflects better economic growth, then that will be positive, if it is in order to keep inflation under control that would be a worry.”
However, while he maintains that it is important not to be complacent on inflation, Bell does not believe that this is a concern at present.
Which begs the question, why should Carney be concerned about the ability of the asset management sector to withstand household selling?
The answer could lie with some of the flags raised earlier this year by the Bank of International Settlements (BIS).
In its annual report it said: “The asset management sector has grown considerably over the past decade. Despite a mid-crisis hiatus, which mirrored mainly valuation losses, global assets under management (AUM) rose from roughly $35 trillion in 2002 to $75 trillion in 2013.
“The sector remains highly concentrated, with the top 20 managers accounting for 40% of total assets… As risk-taking migrates away from the banking sector, asset managers have played a pivotal role together with their customers and these customers’ investment consultants.”
