I have been having trouble nailing one of Chancellor George Osborne's
big fibs. He claims (and he did it again on Sunday's Andrew Marr show) that interest rates for consumers are low because of government austerity, fantasising that if government borrowing costs went up then so would mortgage rates.
We know that the interest rate on government debt is currently at historically low levels. For the record just now FT gives the benchmark rate as 1.96% (yield on 10 year gilts).
On 2 May the FT had a headline:
Households feel pinch as lenders tighten mortgages
It went on:
It is not just mortgages which are becoming more expensive. So too, are rates on bank overdrafts which, at 19.52 per cent, are the highest since the Bank began keeping records in 1995, and credit card rates are their highest since December 2001.
So there we have it; government borrowing costs extraordinarily low, consumer interest rates painfully high.
You might find a textbook which argues that consumer interest rate is made up of the risk-free rate plus a risk premium. The risk-free rate is usually taken to be the rate at which the government borrows. That might support the idea that if government has to pay more to borrow then so will a mortgage holder. Except that the case the Chancellor is talking about is when the market decides that lending to the government is risky. So the government is now paying a risk premium, and there is no reason why a house-buyer should pay for the risk of government default as well as the risk of a mortgage default.
