: Food and commodity prices are soaring and this affects inflation, so the Monetary Policy Committee’s decision to hold rates is understandable. But these are not the only factors the MPC should bear in mind.
Inflation worries have blinded the committee to the threat of a weakening housing market. It has ignored indications that fewer buyers are entering the market and that flat house price inflation looks set to continue.
Although there has been an increase in the number of prospective buyers as the year has progressed, data from the Bank of England reveals that the number of mortgage approvals in January were much lower than in the same period last year.
Bank of England governor Mervyn King has missed an opportunity to bolster consumer confidence by cutting the base rate and home owners are paying the price for his dithering.
While there are sound arguments that the housing market is relatively stable due to a shortage of property and high demand, spiralling mortgage costs are making it hard for buyers to secure funding.
And since the property market relies on the availability of credit to borrowers, there’s a risk that the market will suffer without support from the MPC.
Lenders are increasing their rates whenever they launch new products and banks and building societies have stopped offering high LTV mortgages, threatening to cut first-time buyers off from the market.
So the rate cuts we’ve seen since December haven’t been enough to alleviate the pressure on lenders and borrowers. We need further cuts to enable lenders to pass lower rates on to clients. But it remains unclear whether the MPC will come to its senses and do so.
Brian Murphy: The MPC acted as most commentators expected by holding the base rate this month.
Keeping the rate at 5.25% will enable it to measure the effects of the cuts it made in December and February in terms of their impact on inflation and the wider economy.
Inflation is expected to rise towards 3% by the end of the year and the MPC’s overriding consideration has always been to keep inflation at around 2%.
Although we would welcome any reduction in the base rate we have to be mindful that the MPC looks at the bigger picture.
The economy is still growing and although the pace of growth is likely to be slower than it has been over the past two years it should remain at around 2%. Talk of recession appears premature, with employment levels at an all-time high.
The MPC is keen to stimulate consumer confidence but understands that expectations need to be reasonable. Therefore it won’t want to rush into rash decisions about future cuts. It would be unwise for consumers to expect monthly reductions.
Unfortunately, the decision to hold rates in order to keep a brake on inflation will fail to ease the burden borne by struggling borrowers. With many lenders abandoning the 100% LTV arena and tightening up their lending criteria, the options available for prospective home owners have been severely reduced.
Lenders are using the current climate to increase rates in a bid to increase their profits. The MPC decision has done little to help borrowers and I predict it will be a few months before the base rate is cut any further. This seems sensible given spiralling commodity and energy prices, which could lead to a hike in inflation .