Week 41, 2012: The Cost of Borrowing

Summary: In his speech today, Prime Minister David Cameron appeared to equate the cost of borrowing for the government with mortgage rates for the public.  Coincidentally, the Bank of England released the latest average interest rate figures this week, so we've taken a look at the relationship between the different interest rates.

What does the chart show? The chart shows the monthly average cost of borrowing (the interest rate) for three different groups.  The blue line shows the average yield on UK 10 year government bonds each month.  The green line shows the monthly average variable rate mortgage to UK households.  The red line shows the average interest rate for households looking for a personal loan of £10,000.

Why is the chart interesting? There is a political tendency at the moment to lump government bond yields, mortgage rates and the official bank rate together as "the interest rate".  This was particularly clear today when Mr Cameron said that if lenders lost confidence in the government's deficit reduction plan, it would lead to higher "interest rates" (presumably meaning government bond yields), which would "hurt the economy, and it would hit people hard".  He then went on to point out that "if you have a mortgage of £100,000, just a 1% increase in interest rates would mean an extra £1,000 to pay each year" (this time referring to variable mortgage rates).

All these statements may be true individually, but the implication was that they followed on from each other.  As you can see from this week's graph, there is some tendency for the three interest rates to move together at times.  However, over the past 18 months, the steady decrease in bond yields has not led to lower mortgage rates, which are instead generally based on the official Bank of England Base Rate (held steady at 0.5% since March 2009).