UK inflation fell to a record low last month to a year-on-year rise of just 1.5%. Easing of retail prices was attributed to lower clothing and seasonal food costs. Putting this into context, Britain’s inflation rate is now at its lowest level since the Government started basing its figures on the retail price index (RPI) minus mortgage payments.
The markets responded positively to the news, partly in the hope that authorities have recognised that whole swathes of our economy have slid into recession, further endorsing the view that increasing the cost of borrowing will do more long-term structural harm than good. But where does that leave interest rates and, more importantly, the housing market?
With yields on gilts dropping like a stone and the FTSE at 1996 levels, it is difficult to see why the Bank of England would want to raise rates and there are some expert opinions advocating no movement at all until the end of 2003.
This is an opinion I’m fast subscribing to, given that worldwide inflation is slowing very quickly among the G7 block and the big economies growing slowly ‘ first quarter growth for the UK was a paltry 0.1% which was lower than France, Germany and Italy. More worrying is the fact that manufacturing ‘ the real economy ‘ shrank in 2001 at its fastest rate for 10 years.
With those facts as a backdrop it would seem interest rates are going nowhere. But what, if anything, can the authorities do to calm residential house inflation?
There have recently been reports (quickly and vehemently denied by the Government) of an imposition of Stamp Duty on sales and purchases. What good would that do? All that would happen, in a low rate environment is that purchases would slow and re-mortgaging for home improvements and so on would continue unabated at an accelerated pace.
The probable answer is that the authorities cannot and should not do anything.
The market will eventually sort out the imbalance.
Unfortunately, should stock market confidence remain in the doldrums it will become increasingly difficult for business and industry to go to the market to raise capital for expansion and capital investment. Most sectors of the economy will be affected and it will lead eventually to a rise in unemployment.
To my mind, as sad as the scenario could become, it will be the only way to bring a much needed sense of realism and correction to the market. Mark my words, should investor confidence remain at these levels, something has to give ‘ its not a question of if but more a question of when.
Alan Mudd is director of Savills Private Finance