| Bank of England holds rates at 5.0% |
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| Written by Adrie van der Luijt | |
| Thursday, 08 May 2008 | |
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The Monetary Policy Committee has kept interest rates unchanged, as had been predicted.
Michael Coogan, director general of the Council of Mortgage Lenders (CML), said he understood the conflict between slowing economic growth and rising inflationary pressures, and the uncertainty over some of the data reflected in the split views of MPC members last month. Disappointment He added that the MPC had an opportunity to act to anticipate the worsening economic environment today, however, and called it disappointing that there has been no change. "Mortgage and housing market conditions will remain challenging for the rest of this year, but the majority of existing borrowers are coping well. Anyone who is in financial difficulty, or thinks they may have a problem in the future, should contact their lender or a debt adviser. The earlier you make contact, preferably before you have any arrears, the more options may be available to resolve the financial problem," Coogan said. The Royal Institute of Chartered Surveyors (RICS) also expressed disappointment. Simon Rubinsohn, RICS chief economist, said that the RICS appreciated the risks associated with the recent pick up in inflation and acknowledged the danger of it moving into 'letter writing' territory during the second half of the year. He pointed out, however, that the tone of recent data and surveys suggested that the threat of a sharp slowdown in economic activity was the more pressing issue for the authorities. Spare capacity Housing transactions have collapsed, consumer confidence has sunk to its lowest level since 1992, the service sector appears close to stagnation according to the latest CIPS survey and the retail sector is under immense pressure. There is now a high probability of growth falling short of the Bank of England's expectations as set back in February. Rubinsohn said that this would create the spare capacity to lower inflation in the medium term. Significantly, the latest report from the REC (Recruitment and Employment Confederation) highlights the threat to employment from the deteriorating economic climate. "The RICS believes that the Bank needs to take further pre-emptive action over the coming months starting with the June meeting in an effort to decisively counter the impact of the credit crunch. The Bank should cut the base rate to 4.5 per cent in June if there is no improvement in the data over the next month," Rubinsohn concluded. Pause in the programme of rate cuts The MPC's decision to leave Bank Rate unchanged this month was widely expected, despite conditions continuing to deteriorate in the mortgage and property markets. Ray Boulger of independent mortgage adviser John Charcol explained that the pause in the programme of rate cuts would allow the MPC time to assess the impact of its Special Liquidity Scheme available to Banks and five Building Societies before deciding on the scale and timing of further cuts. He pointed out that so far the impact on three month Libor has been fairly muted, although the rate has edged down to 5.79 per cent, the lowest since Bank Rate was cut to 5 per cent last month. This compares with the recent peak of 6.01 per cent but the Bank Rate/3m Libor spread remains exceptionally high. Boulger believes that recent commodity price increases will have raised further concerns about the Consumer Price Index (CPI) breaching the sacred 3 per cent barrier in the next few months, but said that with companies coming under increasing pressure to cut costs, the danger of wage inflation adding to the overall inflation rate appears to be diminishing. Restricted credit demand Furthermore, with the housing market being such a major influence in the UK economy, the deflationary impact of housing transactions running about 40 per cent lower than last year, combined with falling house prices, will mitigate the increase in inflation and help reduce it later this year. Despite early signs of some confidence beginning to return to the capital markets, following a reassessment of risk after the Fed's bale out of Bear Sterns, availability of mortgage funding remains very tight, with lenders adopting various methods, in addition to pricing, of restricting demand. This includes monthly quotas. "The fact that some lenders, including the daddy of them all, Halifax, have even resorted to refusing to accept applications for a new mortgage on their Standard Variable Rate (SVR) because it has become too competitive just about says it all," Boulger concluded. MPC did not budge Edward Menashy, chief economist at Charles Stanley, said that rumours were swirling around the market late on Wednesday evening that, as a result of a plethora of negative sentiment indicators suggesting that the UK economy had fallen off a cliff, the Monetary Policy Committee of the Bank of England would be forced to cut base rates by 25 basis points “The MPC did not budge however and left base rates unchanged at 5 per cent. The positive message to emerge from the no change decision is that the MPC does not judge the UK economy to be in a parlous condition that requires the first back-to-back reduction in interest rates since 2003,” Menashy added. The previous change in the official rate paid on commercial bank reserves was a reduction of 0.25 percentage points to 5.0 per cent on 10 April 2008. The Committee's latest inflation and output projections will appear in the Inflation Report to be published on Wednesday 14 May. The minutes of the meeting will be published at 9.30am on Wednesday 21 May. Related articles
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