THIS MONTH’S DECISION: HOLD

5 July 2010

Mark Harris
Managing Director, Savills Private Finance
There are thousands of home owners on low SVRs or base rate tracker mortgages for whom a rise in monthly payments would be the catalyst that tips them over the edge. Inflation remains the biggest threat to a static Bank of England base rate but I believe it will fall in line with the government target of 2% later in the year, and most data continues to support this theory. I remain convinced that we will see the base rate at its current level for the next few months provided inflationary pressure is controlled. The UK recovery is fragile in a global economy that remains volatile and I see no reason to do anything other than sit tight and not panic. I vote for a hold.

John Cupis
Managing director, PMS
In last month’s base rate decision I referred to troubles in the eurozone being a significant factor, Greece in particular. More recent events have caused the markets to look at Spain with its worrying level of unemployment - 20% currently - and a profligate government spending way beyond its means. Worried eyes are also turning to France. These things are starting to sound familiar. I think the fiscal measures we face will overshadow medium-term concerns about inflation running above target and I’m now forecasting that we’ll see no change to interest rates for the rest of 2010. I vote to hold the base rate at 0.5% for another month.

Dev Malle
Sales director, Personal Touch Financial Services
For those who were in any doubt about where interest rates would go in 2010 the emergency Budget pretty much answered the question. The chancellor reduced the forecast for growth and some suggest even the new one is optimistic, with significant public sector cuts and the rise in VAT yet to have an impact. And that’s before we take into account the sovereign debt crisis in Europe. The chancellor says inflation will fall to 2.7% by the end of the year but this is before tax rises, spending cuts and increases in unemployment kick in. The big question now is whether we can prevent inflation plunging significantly below 2% in 2011 and avoid a downward spiral. I vote for a hold.

David Finlay
Intermediary business director, Barclays
A move towards tighter fiscal policy will come gradually. In a surprise development one MPC member voted to raise rates last month - the first time anybody has voted for an increase since August 2008. Since then the news that VAT will rise to 20% has put further pressure on the committee to tighten policy. Consumer Price Index inflation is likely to stay close to 3% not just this year but throughout 2011, raising questions about the MPC’s commitment to hitting its 2% target. While acknowledging this risk most MPC members remain most concerned about prospects for growth in Europe and the susceptibility of the banking sector to further shocks. I vote for a hold.

Ray Boulger
Senior technical manager, John Charcol
Despite one MPC member voting for a 0.25% rise last month several factors suggest the base rate should remain at 0.5% for an extended period. One of the factors that drove up inflation recently was the weakness of sterling but with the euro under pressure the pound is now at an 18-month high against it, and it has recovered 5% against the dollar. This will soon be reflected in the CPI. Added to that is growing concern over Greece defaulting. Should that happen there could be serious contagion within the eurozone and the Bank would have to supply more liquidity to the market. Given all these circumstances hiking the base rate now would be madness so I vote for a hold.

Vic Jannels
Chairman, All Types of Mortgages
The emergency Budget confirmed what we already knew about the parlous state of the nation’s finances. Despite the expected cries of foul from some quarters it is possible that the chancellor could have gone further to speed the recovery. Gross debt will continue to rise in the next four years to 74.7% of gross domestic product, and one bank has already indicated that even this figure could be optimistic. Lower food costs have allowed consumer prices to fall more quickly than expected and unemployment seems to have stabilised in recent months, but with austerity measures ahead it could remain around 8% for some considerable time. I vote for a hold.

Mehrdad Yousefi
The emergency Budget indicated a discretionary tightening of policy, building up to 8% of GDP a year by 2015/16 - higher than Canada’s in the 1990s but lower than Sweden’s and Finland’s. Interest rates may go up by less than they would have under the old policy but there’s little scope for them to fall unless the Bank resumes its quantitative easing programme when details of the spending review are announced on October 20. Recent indicators suggest the availability of credit to households and firms is easing, but only slightly. Both gross and net lending by banks to individuals secured on property improved in May but mortgage approvals were lower than April. I vote for a hold.

Fahim Antoniades
Group director, mortgage centre ifa
For the first time in two years an MPC member feels that given improving global economic and inflation prospects it’s time to consider a gradual rise in the base rate. My view is that the VAT reversal in January, rising petrol prices and the falling pound made a shock contribution to inflation but the combined effects of the chancellor’s austerity package and a slow recovery in exports might lead us into another recession. I also believe lenders are shoring up their cash reserves because of fears of sovereign debt defaults by Portugal, Ireland, Greece and Spain, thus hitting liquidity once more. A rise in the base rate now would be premature so I vote for a hold.

Peter Williams
Executive Director, Intermediary Mortgage Lenders Association, and chairman, Shadow MPC
Decision: Hold
Although there was one vote for a base rate rise at the June MPC meeting it is unlikely we will see a hike for July. The latest Bank of England Financial Stability Report underlines the challenge lenders are facing - the need to build up capital while continuing to lend. It questions whether they can rely on retail funding and argues that a return to wholesale funding will be needed. This highlights underlying tensions in the market. Given that the MPC will have more regard to the housing market in future as a measure of inflation and the new Financial Policy Committee will have oversight of credit bubbles, we are moving into new territory in terms of the relationship between monetary policy and the housing sector. I vote for a hold.

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