Melanie Bien Director, Savills Private Finance
There was a massive 1.5% cut in the Bank of England base rate last month so trying to second-guess the Monetary Policy Committee is no easy task these days. But the minutes from its last meeting show that the MPC was unanimous in its decision and felt that a significant reduction in the base rate, possibly in excess of 2%, might be required to meet the government’s inflation target in the medium term. Further efforts were made by chancellor Alistair Darling in his pre-Budget report to encourage spending and boost the economy but the reaction has been muted, which is why further reductions in the base rate are needed sooner rather than later. Now that undershooting the government’s inflation target has become a distinct possibility, the MPC may deliver some good news for Christmas shoppers when it next meets. I vote for a 0.25% cut.
Vic Jannels Chairman, All Types of Mortgages
We live in interesting times. The most recent rate cut of 1.5%, unstable markets and a spend, spend, spend PBR make any prediction something of a lottery. But the odds are stacked in favour of a further reduction as lenders continue to sit on their hands and Dr Darling administers large doses of medicine that the recalcitrant patients are not responding to positively enough. A coordinated approach from the world’s banks should be expected but there must be concerns about the value of sterling. The spectre of increasing unemployment continues to loom large as the economy slows down. The potential costs that this could exact on the government’s carefully considered strategy indicate the need for further positive action so I vote for a 0.75% cut.
Chris May Director, Vision Network
The commodity and energy markets have rapidly tumbled due to growing fears over the global economy. This has reduced inflation, which was the government’s biggest fear, so much so that there is talk of deflation in the coming months. This has massive implications for businesses as they fight for survival in the next year or so. It’s now clear that the government did not prepare us for a downturn while the good times rolled and many economists predict that the UK will suffer a protracted recession. Whitehall not only plans to borrow massively and spend its way out of trouble but will also cut taxes too. What it still doesn’t seem to grasp is that it needs to support the money markets to bring some normality back to our finances. The MPC cut interest rates too late so I’m voting for a further 1.5% reduction this month as we are still playing catch-up.
Dev Malle Sales director, Personal Touch Financial Services
Even after the expected cut in VAT to 15%, it is clear that inflation will continue to fall. Most now believe that despite the fiscal stimulus the government has provided, increasing levels of unemployment and retrenchment in the manufacturing sector will drive inflation well below the 2% target. The Confederation of British Industry says there will be no benefits from a depreciation of the pound and a reduction in order books is forcing a cut in production.With this in mind, the MPC must continue to bolster consumer confidence. Last month’s 1.5% cut may have shocked a few analysts in the City but it is necessary to follow it up with a further reduction this month to provide extra stimulus and momentum. I vote for a 0.5% cut.
Ray Boulger Senior technical manager, John Charcol
Last month’s Quarterly Inflation Report from the Bank highlighted a sea change in inflation expectations since the previous one. Consumer confidence has continued to decline, as has the oil price. A key factor in not cutting the base rate by more than 1.5% last month was uncertainty over the impact of the PBR, in particular the scale of its tax cuts. As it transpired they were well below the more optimistic expectations and initial reactions to the VAT cut indicate that it won’t offer the stimulus required. It is encouraging that three-month Libor has fallen more than 1.5% since last month’s rate cut but the Crosby report suggests that without further government intervention net mortgage lending will be negative in 2009. These factors suggest a further substantial cut is needed and the sooner it is delivered the better. I vote for a 1% cut.
Peter Williams Executive Director, Intermediary Mortgage Lenders Association
The market has responded positively to November’s 1.5% cut and this has helped the mortgage sector and three-month LIBOR. Sterling has suffered although its lower value will support exports, but the evidence is that we still face an escalating downturn. The PBR set out a programme of further fiscal measures, all of which are welcome, but it will take at least 12 months for the funds to come through. So in the short term we must rely on fiscal stimuli to prop up the housing market and further rate cuts that might ease affordability constraints and encourage demand. But we must also note that cuts squeeze operating margins so it becomes increasingly difficult for lenders to pass them on. I vote for a hold.
Jim Cunningham Economic consultant
The talk over the past month about the need for fiscal stimulus at a time of an already large budget deficit is testament to the seriousness of the economic situation. The PBR has delivered a massive easing in fiscal policy. Compared with existing plans, it provides a stimulus equivalent to 2.5% of GDP this year and 2% in 2009. Unless consumers save the extra cash this will help to cushion the downturn, but further action is needed on the monetary front. The Financial Services Authority’s new capital and liquidity requirements for banks and political pledges confirming the safety of retail deposits have increased the pressure on lenders’ profitability. Margins need to be wider so that banks can make a profit and support the economy too. In this light I vote for a further 1% cut in the base rate but think it is destined to fall further.
Fahim Antoniades Director, Quantum Mortgage Brokers
Last month’s base rate cut came as a surprise but its effect on the financial markets was disappointing. The FTSE 100 has fallen by a fifth since the announcement, followed by a fresh wave of job cuts at BT and the Royal Bank of Scotland. The PBR didn’t put real money into consumers’ pockets or stimulate business confidence, so the MPC has a responsibility to do so. The fact that it considered a 2% cut last month suggests that a 0.5% margin is available, but given that inflation figures indicate a large downturn, the MPC will be keen not to undershoot the government’s 2% target next year to avoid deflation. This adds up to aggressive rate reductions and with financial analysts predicting a 1% base rate by February, I vote for a pre-Christmas cut of 1%.
colin shave chief executive,
GE Money Home Lending, and chairman, Shadow MPC
Despite a significant 1.5% interest rate cut in November, financial markets remain volatile. The FTSE has lost a fifth of its value since the Bank of England announced it was taking interest rates to their lowest level in 50 years. And the jury is still out on whether the fiscal incentives announced in the pre-Budget report will have an impact on the economy, although I’m sceptical. It is essential that the Special Liquidity Scheme and Crosby proposals are widened to extend to non-deposit-taking lenders and address the elements of the population most affected by the downturn. Furthermore, based on current indicators it is likely that we will see a dramatic increase in unemployment in 2009, as well as falls of between 10% to 15% in house prices. In light of these trends and the fact that the threat of inflation has receded, the Bank now has the leeway to make another significant cut in interest rates. I believe a further 1% cut would emphasise its intent to stimulate the lending environment.