George Osborne has been accused of intimidating the UK electorate ahead of the much discussed referendum on the U.K.’s membership of the European Union. Today he suggested that it was “likely” that UK mortgage rates would rise in the event of Brexit – a British withdrawal from the European Union. So, is George Osborne being truthful with the UK public or is he scaremongering?
While many of those looking to remove the UK from the European Union will suggest that the currency will be no worse off in the longer term, the short-term situation is difficult to say the least. Since the referendum was announced and we saw increased support for an exit the value of sterling has slumped on the currency markets. This is fact, this is not scaremongering and this is something which will likely get worse before it recovers in the event that Brexit campaigners are successful.
UK interest rates
Looking at the UK outside of the European Union there are serious concerns that sterling could fall significantly as confusion and mayhem would take over in the early days. If the forecast slump in sterling was to continue this would impact import costs therefore pushing the cost of goods in the UK higher. This would have a direct impact upon inflation and, if George Osborne is to be believed, would force the authorities to push up UK interest rates.
The forecast increase in UK interest rates in the event of a continued slump in sterling is not inconceivable but would there be short-term pain and long-term gain?
There is obviously a direct link between base rates and mortgage rates in the UK therefore any increase would immediately impact mortgage rates. Any increase in mortgage rates would probably dampen enthusiasm for UK property market but let us not forget that UK base rates are currently at historic lows. If there was a short-term increase in base rates to protect sterling would this really be such a disaster – as long as it was not excessive?
Uncertainty in the markets
We only have to look at the pressure which sterling is under at the moment to see the current levels of uncertainty in the markets. Uncertainty is the most unsettling of factors for investors because no matter how negative or how positive a clarified situation is, markets will react and find their own level. It is when there is no immediate obvious path which causes some investors to withdraw from the marketplace, certain elements to come under pressure and this can have a knock-on effect to investor sentiment.
Over the next few weeks, ahead of the EU referendum, there will be much talk in the press some of which will be truthful, some misleading and some intimidating. This referendum would seem to be balanced on a knife edge at this moment in time and one wrong move by either party could be extremely damaging.
If we look at the medium to longer term it would seem from historic figures that the European Union needs the UK more than the UK needs the European Union. In light of an exit, it would seem inevitable that a trading arrangement would very quickly be put in place to assist all parties.