Do what Brits do best and hold your nerve

1 June 2012

The past couple of weeks have seen the eurozone debt crisis reach new heights, with the departure of Greece now looking imminent.

But while Germany, the last strong economy left in the eurozone, will have to bear the brunt of the failure of the single European currency experiment, the UK is far from immune from what's happening.

So much so that in the Bank of England's (BoE) latest inflation report, governor Sir Mervyn King expressed deep concern about the UK's ability to recover in the near future, saying we're now "navigating through turbulent waters, with the risk of a storm heading our way from the Continent".

He added that the "the economy will continue to face strong headwinds" and that "the path of recovery is likely to be slow and uncertain".

To add further gloom, and despite the slight fall in inflation in May, the report revealed that inflation is now expected to remain above the 2% target set by the Bank for "the next year or so" – a prediction that comes in stark contrast to the one it made earlier in the year when the BoE forecasted that infl ation would be below the target before the end of the year.

So what does this mean for consumers? Well, for a start, the squeeze on household budgets will continue, as prices will remain high for everything from food to petrol. While these swollen costs may be manageable in isolation, there are two other factors that can make this detrimental to many families across the country.

Salaries and mortgages

Firstly, salaries, if not already frozen, are likely to continue to increase by just a couple of percentage points each year, meaning the majority of us now take home far less than we did a couple of years ago.

And secondly, while mortgage holders have been able to enjoy super-low rates over the past couple of years as a result of the base rate remaining at an all-time low, monthly repayments have now begun to creep up.

Five lenders have already announced that they are putting up their standard variable rates (SVR) – some of them by up to 1.5% – affecting more than 1.13 million borrowers. This has come as a shock for many home owners as many believed that lenders wouldn't raise their rates unless there was a rise in the base rate.

Sadly, however, this is just the start of things to come, as more lenders are likely to follow suit. There are two reasons for this. Banks and building societies now have to fork out more for lending as there's been a rise in the cost of funding loans, partly due to the eurozone crisis.

As a result, they are passing higher costs on to customers. In addition, lenders are also increasing rates and pulling products to avoid attracting more business than they can deal with.

In short, the mortgage market is shrinking and good deals are harder to find. And the outlook is not promising.

Ray Boulger, spokesperson for independent mortgage adviser John Charcol, says: "It is clear that conditions are unlikely to improve for mortgage borrowers in the next few months." I don't want to lie to anyone; there's no quick fix for this and no emergency exit. For the majority of us, there will be some tough times ahead.

Don't despair

But before we despair, and since it's the Jubilee weekend, let's take a moment and think about what our grandparents or parents endured back in the 1950s. Back then, Britain had just come through a war, and many people were suffering from post-traumatic stress. In addition, the economy was in tatters and most Britons could only afford the basic essentials such as food.

If we think we have it tough now, it's nothing compared to how it was back then. But the people of the 1950s did survive, and thrive, and so will we. There will be good times ahead – but while we wait we should just do what us Brits do best, which is keep calm and carry on.

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