The New Year is set to see further gradual increases in the base rate. The Monetary Policy Committee (MPC) has indicated it does not think house price growth and current levels of consumer debt are unsustainable. However, it said the recent rate increase was necessary to curb future increases in borrowing. Recently released MPC minutes have also referred to an increase in the Bank of England’s growth and inflation forecasts, indicating further rate increases.
Laurence Sanders, economist at Bristol & West, commented: “The Bank needs to apply a gradual touch to the monetary brakes over time to secure a soft landing in the housing market.” He forecast no base rate increase in January but a probable 0.25% rise in February.
Noting that the money markets are expecting rates of 5% by the end of next year, and pointing out that any prediction over a year is a view rather than a forecast, he added: “We predict that the MPC will increase base rate by around 0.25% every quarter to 4.75% by the end of 2004, with further rises to a peak of 5.5% in mid 2004.”
Sanders pointed out that the housing market remains resilient and house price inflation on mortgage lender’s indices will end the year well into double figures. However, this is not set to continue: “We forecast the gradual slowdown in house price inflation will continue with a reduction to 10% in 2004 and 5% in 2005. The increase in base rates will be balanced by economic recovery.”