Aurelia Butler

Interest-only mortgages are typically favoured by wealthier customers but sharp increases in Bank of England interest rates mean that borrowers face big hikes in monthly interest payments.The FCA said there are fewer than one million interest-only mortgages outstanding, down by half since 2015, as borrowers move in greater numbers onto repayment loans, or repaying earlier than expected.Of those remaining, 72,000 are not due to mature until 2031, with 77,000 in 2032, with a smaller peak in 2027, meaning borrowers without a capital repayment plan still have time to act, the watchdog said in new research on Tuesday.”Whilst it is encouraging to see the number of interest-only mortgages reducing faster than expected, with the majority of loans being paid off or transferred to other products, the challenge remains for a significant number of borrowers,” David Geale, director of retail banking at the FCA, said in a statement.FCA research found that 82% of the borrowers were confident in their ability to repay outstanding capital at the end of the loan’s term.”However, the research suggests this may be overly optimistic – while 36% of borrowers expected some shortfall, modelling suggests this could be closer to 46%,” the FCA said.”The FCA will now be engaging with industry and consumer groups to discuss the research findings and how lenders can further support borrowers who may not be able to repay all the capital owed at the end of their mortgage term.” More

An old macro joke is that there are really only four types of economies: developed, developing, Japan and Argentina. And oh boy did we get another reminder of that this weekend. From mainFT yesterday:Markets in Argentina reeled on Monday after the shock victory of Javier Milei, a radical libertarian economist and outsider candidate, in the country’s primary poll ahead of its presidential election later this year. Bonds and equities both swung wildly after Milei won more than 30 per cent of the vote on pledges to dollarise the country’s economy and dramatically cut spending. The central bank responded quickly by devaluing its official exchange rate by as much as 18 per cent to 350 pesos per dollar to stabilise markets. It also lifted interest rates by 21 percentage points to 118 per cent as it runs out of means to defend its currency. This is an entire country trapped in an unfunny Groundhog Day. Argentina constantly swings violently from one political extreme to another, with every fleeting spasm of reform and macroeconomic improvement over the years quickly overpowered by the seemingly irresistible force of simply being Argentina. So, will its next president be someone who has vowed to burn down the central bank, legalise organ sales and wants to dollarise the economy without any actual dollars? Maybe not. JPMorgan notes how the participation rate in the weekend’s poll came close to the post-Covid lows, which could mean that the establishment parties do better in the actual general election.History shows that participation rate usually increases between the primaries and the general elections by about 4%-pt on average. That said, given the historically low participation rate and the strong underperformance of Massa and Larreta vis-à-vis polls (by about 4%-pt each), it seems fair to assume that participation rate could grow even higher than that observed on average. Against this backdrop, a higher turnover rate in the general elections could favor Juntos por el Cambio and Union Por la Patria, suggesting higher upside for traditional parties in the general elections as compared to Milei, which we see closer to its ceiling in terms of vote intention.However, given that it’s Argentina, the smart money is always on the most chaotic outcome. And given the already fraught economic and financial background — plus Argentina’s permanent dance with the IMF — the “Milei-Quake” is still going to “usher in a period of intensified uncertainty”, according to JPMorgan (sellsidespeak for ‘wot a mess lol’): The existing financial landscape is set to deteriorate further, potentially exerting an influence on the October elections. The interplay between economic dynamics and political maneuvering underscores the complexity of the situation, adding an extra layer of uncertainty to an already intricate web of challenges. As we move closer to October, the intricate dance between economic realities and political ambitions will undoubtedly shape the course ahead.Goldman Sachs highlights that the currency devaluation and rate hike is at best a sticking plaster. The new official 350 pesos per dollar exchange rate is still wildly out of whack with the ca 630 rate the peso is actually trading at, and net international reserves are now actually negative. Goldman also engages in a bit of frustrated hand-waving at the scale of the Argentine mess:The macroeconomic backdrop in Argentina remains very complex. Inflation is tracking in the triple digits and is likely to accelerate in the coming months, international reserves are at critically low levels with net international reserves in negative territory, and the program with the International Monetary Fund (IMF) has suffered setbacks. Recently and after some delays, IMF and Argentine authorities reached a staff-level agreement on the combined fifth and sixth reviews of the EFF program. Given the lack of compliance with the quantitative targets of the program, however, Argentina would have to request waivers from the Fund’s Executive Board, for the approval of the review and setting of new targets. In our view, while today’s decision could be part of the discussion between the IMF and Argentina, we believe that the Fund and the next government will need to holistically review the program as part of a more comprehensive macroeconomic program that puts the economy on a structurally more sustainable trajectory.The problem for the IMF is that Argentina is comfortably its biggest debtor, after a stupendously big programme signed in 2018 that almost immediately veered off course. And as the cliché goes, if you owe the bank a million dollars you have a problem; if you owe it $44bn then the bank has a problem. Yesterday evening the IMF released the following terse statement:On July 28, the Argentine authorities and IMF staff reached staff-level agreement on the combined fifth and sixth reviews under Argentina’s 30-month Extended Fund Facility (EFF) arrangement. This agreement is subject to the approval by the IMF Executive Board, which is expected to meet on August 23 to unlock the agreed disbursements.We welcome the authorities’ recent policy actions and commitment going forward to safeguard stability, rebuild reserves and enhance fiscal order.Ok then! More

UK wages grew much more than expected and at a record annual pace in the three months to June, according to official figures that are likely to reinforce the Bank of England’s concerns over the pressures fuelling inflation. In April to June, annual growth in regular pay, which excludes bonuses, was 7.8 per cent, according to data published on Tuesday by the Office for National Statistics. It is the highest annual growth rate since comparable records began in 2001, and pushed nominal pay above price growth for the first time in more than a year. Annual growth in employees’ average total pay, which includes bonuses, was 8.2 per cent in the three months to June, up from 7.2 per cent in the three months to May and the largest annual growth rate seen outside the coronavirus pandemic period.The annual rate of growth in total pay was affected by one-off bonus payments made by the government to NHS staff in June, but both key measures of wage pressures far exceeded analysts’ expectations.Economists polled by Reuters had forecast increases in total and regular pay of 7.3 per cent and 7.4 per cent respectively. The BoE’s Monetary Policy Committee carefully watches wage growth and labour market data for signs of persistent price pressures. The bigger than expected figures on pay resulted in market expectations for a 0.25 percentage point rise in interest rates in September jumping to 99 per cent. This was despite clear signs that the labour market continued to loosen, with an unexpected rise in unemployment, falling inactivity and declining employment.

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Accelerating wage growth “supports our view that the Bank of England will deliver one more 25 basis point rate hike before it brings its tightening cycle to a close”, said Ruth Gregory, deputy chief UK economist at the consultancy Capital Economics.She added that interest rate expectations could change after inflation data for July was published on Wednesday, with analysts forecasting a sharp slowdown in the rate of consumer price rises to 6.8 per cent, down from 7.9 per cent in June. Separate figures released on Tuesday by research company Kantar showed that the rate of grocery price inflation stood at 12.7 per cent in the four weeks to August 6, down 2.2 percentage points from the previous month.Asked if strong wage growth would force the MPC to vote for a 15th consecutive interest rate rise, Prime Minister Rishi Sunak said monetary policy was a question for the BoE. “If we get through this, people will really start to see the benefit in their bank accounts, in their pockets, as inflation starts to fall,” he told reporters. Sterling rose 0.16 per cent against the dollar on the back of the workforce data. Markets also increased the odds of the BoE lifting interest rates to 6 per cent by the end of this year from 5.25 per cent at present. Tuesday’s data showed no sign of the expected easing of private sector pay growth. Annual average regular pay growth for the private sector was 8.2 per cent in the three months to June, the largest annual growth rate seen outside of the Covid-19 period.With inflation easing, annual growth in regular pay exceeded price increases for the first time since March 2022, up from a 3.1 per cent contraction in the three months to February. Nye Cominetti, economist at the Resolution Foundation think-tank, said the figures marked the end of Britain’s “painful pay squeeze”. While earnings were finally higher than they were before the 2008-09 global financial crisis, he said the “15-year stagnation has cost average workers £230 a week — and left Britain a far poorer country”.Employment minister Guy Opperman said Tuesday’s data displayed how “our jobs market continues to show its strength with employment at near record levels and inactivity down by over 300,000 since the pandemic peak”. He added that combined with falling inflation and the government’s package of reforms to remove barriers to work, “we are on the right path to drive down household costs and grow our economy”. However, labour market conditions also loosened more than expected. In the three months to June, the rate of unemployment increased 0.3 percentage points on the quarter to 4.2 per cent, in contrast with analysts’ expectations of no change. The number of people in employment fell by 66,000 in the three months to June, whereas economists had forecast a 75,000 increase. Job inactivity also marginally declined to 20.9 per cent, despite the number of people prevented from working by long-term sickness hitting a new record.

Jonathan Ashworth, shadow work and pensions secretary, said the ONS data showed the government was “failing working people and businesses across Britain”.He said: “Families are struggling to get by, there are record numbers of people out of work due to long-term sickness and the employment rate for over-50s is still below pre-pandemic levels . . . The consequence is thousands written off and a rising benefit bill.”In May to July, the estimated number of vacancies fell by 66,000 on the quarter to 1.02mn, marking the 13th consecutive period of decline, although job vacancies remained higher than before the pandemic.Samuel Tombs, chief UK economist at the consultancy Pantheon Macroeconomics, said the ONS data showed that while slack in the labour market was increasing rapidly, “wage growth still has too much momentum for the MPC to stop tightening just yet”.Additional reporting by Lucy Fisher and Anna Gross in London More

China has said it will stop publishing data on youth unemployment, weeks after the gauge hit a record level, in a sign of mounting pressure on policymakers as new data pointed to weakness in the recovery of the world’s second-largest economy.The People’s Bank of China on Tuesday also unexpectedly cut a benchmark interest rate by the biggest margin since the start of the coronavirus pandemic, reflecting official concerns over a loss of momentum months after Covid-19 restrictions were lifted.Beijing is grappling with a host of economic challenges, including a liquidity crisis in the property sector, a sharp fall in exports, flagging foreign investment and sustained weakness in consumption.Youth unemployment, which China began reporting in 2018, hit 21.3 per cent in June, but the figure was not included in a wider data release for July on Tuesday. The report largely undershot expectations and showed growth slowed in retail sales and industrial production, two intended engines of the country’s economic recovery.

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Retail sales added just 2.5 per cent year on year in July, while industrial production expanded 3.7 per cent. Both metrics missed forecasts and were below June’s figures of 3.1 and 4.4 per cent, respectively. The general unemployment rate was 5.3 per cent in July, up from 5.2 per cent in June.The yield on 10-year Chinese government bonds fell 0.05 percentage points to 2.572 per cent on Tuesday following the announcement, while the renminbi slipped as much as 0.4 per cent against the dollar to Rmb7.2864. China’s benchmark CSI 300 index of Shanghai- and Shenzhen-listed stocks was down 0.5 per cent.The exclusion of China’s youth joblessness rate will compound the challenges of parsing the country’s economic data, which analysts say has become more difficult in recent years. Last year, Beijing delayed the release of third-quarter gross domestic product data, which was set to come out during the 20th Chinese Communist party conference.Labour statistics needed to be “advanced and optimised”, said Fu Linghui, spokesperson for the National Bureau of Statistics.

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The PBoC on Tuesday cut its one-year medium-term lending facility rate, which affects loans to financial institutions, by 15 basis points to 2.5 per cent. The rate, which was also reduced in June by 10 basis points, is now at its lowest level since it was launched in 2014.While Beijing has stopped short of unleashing major stimulus, further cuts to borrowing costs for businesses and households are expected next week. The central bank on Tuesday also trimmed the seven-day reverse repurchasing rate, which manages short-term banking liquidity, by 10bp to 1.8 per cent.

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“The market was expecting the PBoC to wait until September before easing again, and today’s cuts suggest that the authorities’ concern about the state of the macroeconomy is mounting,” Robert Carnell, head of Asia-Pacific research at ING, wrote in a note.“If it isn’t there, it must be bad news,” he said of the unemployment figures.Fears of slow growth in the property sector, which has been paralysed for two years by dozens of developer defaults, have been renewed in recent days after Country Garden, China’s largest private homebuilder, missed payments on international bonds. Entities linked to Zhongzhi, a major domestic conglomerate, have also missed payments on investment products.New construction starts were down 24.5 per cent year on year in the January-July period, official data showed on Tuesday. Property investment dropped 8.5 per cent, worsening from a 7.9 per cent fall in the first half.Additional reporting by Andy Lin and Hudson Lockett in Hong Kong More

The former Goldman Sachs economist who coined the Brics acronym has dismissed as “ridiculous” the notion that the group of emerging nations might develop its own currency, as Brazil, Russia, India, China and South Africa prepare to discuss whether to expand the bloc.Ahead of the group’s 15th summit next week, Lord Jim O’Neill told the Financial Times that the Brics had “never achieved anything since they first started meeting”, eight years after he created the phrase in a 2001 research note he wrote as the bank’s chief economist.Brics nations such as Russia and China have called for the bloc to challenge the US dollar’s status as the world’s reserve currency, but South Africa, which is hosting this year’s summit, has said a Brics currency is not on the agenda for the gathering in Johannesburg.O’Neill said creating a common currency for the five strongly diverging economies would be unfeasible.“It’s just ridiculous,” he said in response to calls for a “trading currency” from Brazilian president Luiz Inácio Lula da Silva and other politicians from the bloc. “They’re going to create a Brics central bank? How would you do that? It’s embarrassing almost.”O’Neill coined the Brics acronym in a Goldman paper in order to highlight the economic potential of Brazil, Russia, India and China and the need for global economic and political governance to be reshaped to include them. The countries themselves embraced the term and began holding summits in 2009.With dozens of countries formally or informally expressing interest in joining the bloc, according to a South African diplomat, the summit could be its biggest leap forward in membership since South Africa joined in 2010. But criteria for admission have not been decided, and the issue of expansion has emerged as another faultline among the quintet.The FT reported earlier this year that Saudi Arabia was in talks to join the New Development Bank, the lender set up by the Brics members in 2014 as an alternative to the World Bank, and subsequently joined by Egypt, Bangladesh and the United Arab Emirates.“Quite what they attempt to achieve beyond powerful symbolism, I don’t know,” said O’Neill, who is now a senior adviser at UK think-tank Chatham House.He said the dollar’s dominance over the global financial system was not beneficial for emerging countries. “The dollar’s role is not ideal for the way the world has evolved. You’ve got all these economies who live on this cyclical never-ending twist of whatever the [US Federal Reserve] decides to do in the interests of the US.”While the bloc, which has a collective population of more than 3bn, is keen to increase the use of local currencies in trading activity between member states, Leslie Maasdorp, chief financial officer of the NDB, told Bloomberg TV last month that the Brics bloc was not in a position to create a common currency.Reflecting on previous predictions that the yen, euro or renminbi would eventually surpass the dollar, O’Neill said: “None of these things will ever happen until those countries want to have their currencies used by people in other parts of the world.”

South Africa has already had to rejig the summit after Russia’s president Vladimir Putin opted to skip the event because of his indictment by the International Criminal Court. As an ICC member South Africa would have been legally obliged to arrest Putin on arrival in the country. He will take part remotely, while his foreign minister Sergei Lavrov will attend. While China and South Africa are pushing to expand the Brics club to other countries in the global south, reports have suggested that India opposes the proposal to include more members.“It’s a good job for the west that China and India never agree on anything, because if they did the dominance of the dollar would be a lot more vulnerable,” said O’Neill.“I often say to Chinese policymakers . . . forget your endless historical battles and try to invite India to share the leadership on some big issues, because then the world might take you a bit more seriously.” More