Economics CPD Courses

Economics CPD Courses Coming up this Term!- Book Your Places Now!

WOW! Economics 2015   |   Quantitative Methods (New Spec)


Economics Resources Popular resources on the {my channel} blogPopular resources on the {my channel} blog Economics revision quizzes Resource tags for the blog RSS Feed for the blog Twitter feed for this blog Teacher Email Resource Newsletter Category listing for this blog Economics Blog home page Economics Blog Home Page


Tracker Pixel for Entry

Mortgage interest rates, LIBOR and game theory

Saturday, March 03, 2012
Print Tweet This!Save to Favorites

This morning’s headline on BBC Breakfast was the news that yesterday RBS raised the interest rate on three of its mortgage products by a quarter of a percent to 4%. Three days ago the Halifax wrote to its mortgage holders saying that it intends to raise the cap on its Standard Variable Rate (SVR) to 3.75% above base rate, rather than the current 3%. As the Telegraph reports, although this doesn’t guarantee that Halifax would raise the rate itself, brokers”… believe otherwise and suggested that this would soon happen for a million Halifax borrowers” – and the BBC are now reporting an expectation that the Halifax will announce a rise in the SVR with effect from 1st May. For A level economists this story has several implications.

The first is clearly in macroeconomics, with the likely effect on consumer spending. We know well how squeezed consumers are, with rises in fuel and food prices, and the Bank of England has regularly expressed the importance of keeping base rates low in order to allow households to keep their heads above water. For mortgage holders with an interest-only mortgage, the RBS rate increase represents a 14% increase in their monthly mortgage payment – highlighted in this BBC video report.

The second concerns kinked demand curves and game theory. We have already seen RBS actually raising their rate and a likelihood that Halifax are about to do the same. Stuart Gregory from Lentune Mortgage Consultancy, who used to work for Halifax, told the Telegraph he expected to see a “chain of events” whereby other lenders also increased rates. “Once one does it, the others see it as an opportunity,” he said. This sounds like oligopoly behaviour to me. Mortgage lenders have all held their rates low for almost three years since Base Rate sunk to 0.5% in March 2009. This could be because, in close competition with each other, they have been stuck on the apex of a kinked demand curve, not feeling that the market would allow them either to raise rates and increase their returns – perhaps because competitors would not follow suit, and in any case their clients couldn’t afford the repayments - or to lower rates and try to gain larger market share – perhaps because they can’t afford the lower margins.

But something must have changed to cause RBS and Halifax to risk moving away from the established position, and guess that others will follow suit. There is certainly no signal from the Monetary Policy Committee or the Bank of England, who are more inclined at the moment to give the impression that 0.5% remains set in stone. The justification given by RBS is a rise in their borrowing costs. Partly due to rises in the LIBOR rate – as this graph shows, there may be some justification for this as there was a significant rise between November 2011 and the end of January 2012, although it has fallen back a little during February.


Source: thisismoney.co.uk

A second reason may be that savers are becoming more savvy in moving their funds between banks and accounts in order to seek the best possible rate, squeezing the margin between the rate that banks pay to savers and charge to borrowers – a new paradox of thrift. And a third was suggested by Paul Lewis on the BBC this morning; could it be that base rate, stuck so low for so long, is losing its power as a signal to other banks, who see official monetary policy as increasingly disconnected from the real world?



 

FOR MORE REVISION SUPPORT FROM THE TUTOR2U TEAM...

Follow the tutor2u team and all our subject blogs on Twitter

Register for free tutor2u revision classes at our sister site Zondle:

Use the following class codes to join our Zondle revision classes:

Economics: AS Micro 290-66327 AS Macro 290-66328 A2 Micro 290-66329 A2 Macro 290-66330

AQA AS/A2 Business: BUSS1 290-66325 BUSS2 290-66326 BUSS3 290-66323 BUSS4 290-66322

 



Economics CPD Courses in June 2014

Economics CPD Courses in June 2014 - Book Your Places Now!

ETNC 2014   | New to AS & A2 Economics | WOW! Economics 2014


tutor2u online store

PowerPoint Lesson Activities Teacher Conferences & CPD Courses
Exam Coaching & Revision Workshops Pre-release Case Study Toolkits
A Level Economics Teaching Support Resources for Business Studies
Digital Magazines  


Enter your Email


WOW! Economics 2015

Dates and Locations announced for WOW! Economics 2015

AS, A2 & IB Economics Revision Notes

Latest resources

Resource categories Blog RSS feed Blog RSS Feed

© Copyright Tutor2u Limited 2013 All Rights Reserved