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MPC: Premature UK rate rise could lead to ‘economic vulnerability’

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  • 23/07/2014
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MPC: Premature UK rate rise could lead to ‘economic vulnerability’
Weak UK wage and global growth growth figures means an early rate rise could still destabilise the recovery leaving the economy vulnerable to shocks, according to the latest Monetary Policy Committee minutes.

Despite economists polled by Reuters seeing a 40% chance of a rate rise this year, committee members are not drifting in any clear direction yet.

After voting to hold QE and rates stable in July, the minutes said ‘members had no pre-set timing for the first increase in bank rate, which would be driven by the data.’

The home and mortgage markets dominated the July Minutes with all agreeing slowing output growth was most evident in the UK housing market.

The Committee said falling mortgage approvals for the fourth month in-a-row could persist driven by the effects of the Mortgage Market Review regulatory changes.

“But even if lenders returned to a more normal level of business by mid-summer, the impact on borrowers’ behaviour might prove more durable and might slow growth in expenditures associated with moving house,” it said.

It was too soon to tell the effect of the tougher stress test and income multiple cap announced by the FPC to mitigate risks to indebtedness from the housing market in the May inflation report.

But given the impact on consumer and lender confidence, it warned: “Taking all these factors together there was some expectation that, when the Committee came to update its forecast, the outlook for activity in the housing market would be slightly less strong than it had previously thought.”

Despite the substantial 25 basis point increase in one-year swap rates to just above 1.5% in just one month, financial markets continue to price in a BBR of 2.5% in three years’ time, confirmed the Committee.

For the Monetary Policy Committee minutes in full, click HERE.

 

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