With a rate hike still thought to be a long way off, commentator predictions still span a hefty three years – from 2013 to 2016 – highlighting the divergence of opinion.
In November’s Mortgage Solutions poll, over half of brokers said they expected base rate to stay at 0.5% until 2014 or longer as the global economic outlook darkens, while 34% said they expect a hike next year in 2013.
However, last month the Centre for Economics and Business Research (CEBR) predicted interest rates to stay at 0.5% until 2016. Its other forecasts included inflation falling to 1.7% by Q4 and to remain around 2% thereafter, and for quantitative easing to increase to a total of £400bn over 2012.
Another rate hold with an additional £50bn of QE were announced today at mid-day. This takes the bank’s total planned acquisitions to £325bn worth of assets, mostly gilts to help boost broad money supply and credit, and boost growth to meet the 2% inflation target.
Quantitative Easing allows the BoE to electronically create new money and use it to purchase gilts from private investors such as pension funds and insurance companies or commercial banks.
The BoE insists this new money should encourage banks and financial businesses to lend more to companies and individuals, helping stimulate the economy.
Paul Diggle, property economist at Capital Economics said inflation will continue to fall this year and “open the gates for further quantitative easing.”
“Low inflation will give the BoE the space to keep interest rates on hold. It will also enable the Bank to do further rounds of quantitative easing and the implications of these factors will be that the cost of mortgage lending will remain low.
“The nature of the high inflation we’ve had so far has been a difficult sort of inflation for households to deal with because it has been the bare essentials such as food and energy prices that have seen a hike. Those sorts of prices look like they’re coming down and that will help households.”
However, Diggle said consumers will continue to feel the squeeze despite falling prices, because people’s disposable incomes have still fallen over the last few years.
“That will impact spending habits in 2012,” he said.
Robert Gardner, Nationwide’s chief economist added that wage growth is the biggest factor holding back consumers.
“The squeeze will still be there for households, it just won’t be as intense as it was last year. However, this is only part of the issue because the other side depends on what’s happening with people’s earnings.
“As we look ahead, the BoE thinks inflation will fall below 2% before the end of the year, but at the same time most people don’t think that wage growth is going to accelerate sharply from here given that unemployment is so high.”
Gardner insists that it’s going to take an improvement in labour market conditions and people’s expectations for their own incomes and for the wider economy to improve before people feel more confident or interested in the property market.
CML chief economist Bob Pannell said permanently low inflation and a low interest rate environment allow incomes to grow.
“This is hugely more positive than the period we’re just coming out of where households saw real incomes shrink by 2-3% per annum.
“House prices look like they will stay within reach of young people. One of the things that has been happening over time is that a large portion of younger people have chosen to remain in the private rented sector, but I suspect that there is a reasonably sized portion who want to become homeowners and even if real incomes aren’t racing forward, if the housing market looks settled and not showing the same cyclicality, I suspect we’ll see some healthier appetite with respect to homeownership and housing purchase.
“In terms of whether the funding is able to facilitate that, the issue there is how investors see a whole range of asset classes and it may well be that residential property looks relatively attractive.”
Base Rate predictions
Diggle said that the CEBR’s forecast of a base rate hike in 2016 is looking more realistic.
“We certainly won’t have any movement this year or next, and it’s perfectly possible we won’t see any movement in 2014 or 2015, so the CEBR’s forecast is not totally off the charts.”
Gardner added that Nationwide expects the economy to gather pace by the back end of this year.
“We think it will be in the middle of 2013 before the MPC sees enough evidence that the economy is back on track and feels comfortable enough to start raising base rate.”
The CML’s Panell said that a base rate hike is off the cards for the next two years.
“I can only echo what the financial markets are saying and it looks like we’re going to see some more quantitative easing and rates are going to say where they are for a contracted period. A base rate hike is certainly not on the horizon for this year or 2013.”
