Hello and welcome. You are listening to Patrick Boyle on Finance, a podcast exploring ideas from quantitative finance, examining events occurring in markets right now and financial history to see what lessons can be taken away, including interviews with some of the most interesting people in the world of finance. To learn more about the podcast, visit onfinance.org.

Interest rates in the UK have been rising at a rapid rate. And as we saw this March, when a number of

US regional banks collapsed, rising interest rates can have a severe impact.

In many countries like the United States, where the majority of my viewers live, long-term

fixed-rate mortgages are standard, where borrowers lock in an interest rate for decades,

typically 15 or 30 years. In the UK, what they call a fixed rate

mortgage is really just an adjustable rate mortgage where the interest rate has been locked in

for the first two or five years. At the end of that time, borrowers usually refinance their

mortgages again to lock in a new stable rate

for the next few years. They can of course just stick with their mortgage which will

have flipped to a floating rate. The reason for this different structure is that the British

mortgage industry has traditionally been dominated by building societies,

whose funding must be at least 50% deposits. Deposits are a floating rate and can be withdrawn at any point

in time, and so building societies prefer issuing variable rate mortgages to reduce asset liability mismatch.

In the US, the mortgage sector really only functions the way it does with long-term fixed-rate

mortgages, not because of free markets, but due to a long tradition of government support

for mortgage lending through funding Fannie Mae

and Freddie Mac. Inflation has been more persistent in the UK than in many peer nations.

The UK inflation rate, which was announced earlier this week, remained stuck at 8.7% for May, worse than the 8.4% that was expected.

This compares to 6% in France, 6.3% in Germany, 7.1% across the whole of the EU, and 2.7% in the

United States, using the most comparable measures.

There was no good news to be found by digging deeper into the inflation numbers either,

...