The exposure of the UK to the US sub-prime loans crisis will push up mortgage rates in the UK, a former Bank of England adviser warned yesterday.
Former member of the Bank of England Monetary Policy Committee, Professor Willem Buiter said banks were in a state of ‘fear and loathing’.
He added that their reluctance to lend to each other had raised interbank lending rates, and this is likely to lead to an increase in standard mortgage rates.
A number of banks fear their rivals may be hiding multi-million pound losses on sub-prime mortgages in the US.
As a result, they are currently lending to each other in the interbank money markets at an interest rate of nearly 6.9 per cent, well above the Bank of England’s 5.75 per cent standard bank rate.
Buiter commented: ‘The extent to which this translates into higher rates being charged to households and mortgages or hire purchase loans or higher loans to businesses in the real economy, that, I think, is an open question.
‘The longer it lasts, the more likely it is that all rates from deposit rates to mortgage rates to loan rates will, ultimately, in the private sector get pulled up to that level.’
He maintained: ‘It is a new type of crisis – it is not an old fashioned banking crisis. We don’t know how long it is going to last.
‘Gradually clarity will dawn, but how long it will take, it could be weeks, it could be a few months.’
Another former Bank of England adviser, Danny Gabay echoed Buiter’s warning after five banks upped their interest rates for savers to 6.7 per cent.
Gabay said: ‘It is not in the nature of banks to offer savings rates higher than their mortgage rates. This is a precursor to higher mortgage costs.’
Meanwhile, former US central banker Alan Greenspan has compared the current market turmoil with the crash of 1987 and the fallout from the near-demise of Long-Term Capital Management in 1998.
In a Brookings Institute speech, the ex-Federal Reserve chairman warned that anxiety over a global credit squeeze triggered by the US housing slump was driven by ‘fear’.
He added: ‘The human race has never found a way to confront bubbles.’
He said: ‘The expansion phase of the economy is quite different and fear as a driver, which is going on today, is far more potent than euphoria.’
Greenspan drew parallels with US financial panics down the years, driven either by a collapse in confidence in banks or land speculation turning sour.
He added: ‘The behaviour in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998 and what we saw in the stock market crash of 1987.’
The US Federal Reserve has said sub-prime losses could total $100bn and is under pressure to cut interest rates later this month.
1987 saw the largest one-day peacetime fall in the US stock market, when more than 20 per cent was wiped off the price of shares on the Dow Jones index of leading companies.
The collapse was triggered by widespread fear that the US economy was set to contract after a period of feverish expansion, in which borrowed money, some of it high-risk, was used to fund huge takeovers.
The financial problems of Long-Term Capital Management were triggered by the Asian financial crisis of 1997, which spread to Russia and Brazil a year later.