You are here: Home - News -

Raising base rate: the finest of balancing acts

by: Mark Posniak of Drawbridge
  • 22/02/2011
  • 0
Raising base rate: the finest of balancing acts
There’s a huge amount of debate right now about when interest rates are going to rise, which will clearly have a major impact on the fate of the property market.

The predicament that the Monetary Policy Committee (MPC) is in was highlighted last week when CPI inflation came out at 4% while, 24 hours later, UK unemployment was once again shown to have risen.

Make no bones about it. Rising inflation, whether it’s been imported through high commodity prices or caused by the VAT rise, is placing real pressure on the MPC to raise rates, however non-committal Mervyn King remains during his press conferences.

At the same time, rising unemployment on the back of an economy that contracted in Q4 makes hiking Bank rate a dangerous thing to do, especially when you factor in the fiscal squeeze that has really yet to kick in and already decimated consumer confidence.

Increased borrowing and loan repayment costs caused by higher rates could well be the straw that breaks the camel’s back and sends the UK tumbling back into recession.

On 23 February, we’ll have a better idea of what’s going to happen to rates when the minutes of the latest interest rate decision meeting come out. There’s a real possibility that one or more members of the MPC may have voted for a tightening in policy.

What’s sure is that King and his cohorts on the MPC are going to place every single piece of data emerging from the economy in the weeks ahead firmly under the microscope.

Things are certainly changing by the day. On 15 February, a rate rise as early as May was the consensus, but by the next day, following the poor unemployment data, the market view was that it was looking more like the second half of the year.

At the current time, with the risks to the upside and downside so finely balanced, the data flow will be decisive as to when rates rise.

As important as the timing of rate rises, of course, is the amount by which rates rise and the pace at which they rise. If they go up by too much too quickly, the economy will get the bends, as will the property market.

The UK property market is already facing downward pressure from weak demand and higher interest rates too soon could obliterate it.

Even if rates are raised only marginally, the property market could react adversely and many households, geared up to the eyeballs and sitting exposed on SVRs, could default on their mortgages.

This year is shaping up to be an extremely tough one for house prices.

Our own view? With the ongoing fragility of the economy, the VAT hike, rising unemployment and very low consumer confidence, we cannot see the MPC raising Bank rate during the first half of 2011, despite the tangible threat of inflation. Right now, the risks remain primarily on the downside.

Mark Posniak is marketing and operations director at Drawbridge Finance

There are 0 Comment(s)

You may also be interested in

Read previous post:
Time for some creative solutions

One of the great things about the British is our proven ability to innovate and invent solutions.