Mark Harris managing Director, Savills Private Finance
Good news for borrowers but bad news for savers – this is a phrase I expect we’ll get used to hearing in the coming months and, if Ernst &Young is to be believed, years. It has made a bold prediction that the Bank of England base rate will remain at 0.5% until 2014. Predicting the base rate for the next four years is a job I will leave to the experts but predicting it for the next month is one I’m willing to take on. The economic recovery remains pretty fragile and any rise in the base rate now could threaten a sustained upturn. Also, I expect inflationary pressure to subside in the coming months. For these simple reasons, I vote for a hold.
John Cupis managing director, PMS
Ben Bernanke, chairman of the US Federal Reserve, recently described the West’s most powerful economy as being subject to unusual uncertainty and said that conditions justified an exceptionally low level for the federal funds rate for an extended period. The markets got spooked and the Dow Jones index took a hit. In the UK, despite inflation falling slightly to 3.2% and Monetary Policy Committee member Andrew Sentance voting to raise the base rate by 0.25% the inflation figures mask unsettling growth predictions in light of the fiscal withdrawals likely next year. In last month’s column I said there should be no change in the base rate for the rest of this year at least. I vote for a hold.
Dev Malle sales director, Personal Touch Financial Services
There are two contradictory factors that the MPC has to consider this month. The first is the fall in unemployment and the second is the reduction in inflation for the second month running, to 3.2% in June. Despite concerns that core inflation is continuing to rise, most commentators believe it will fall along with the erosion of real incomes and increasing unemployment. While unemployment fell by 0.1% to 2.47 million in July, much of this was driven by part-time and temporary private sector jobs. This is unlikely to plug the gap in public sector unemployment that will be created as a result of the cuts announced in the emergency Budget. This points towards a delicate economic situation, so I vote for a hold.
David finlay intermediary business director, Barclays
Most MPC members seem cautious about the outlook for growth so I expect the base rate to remain at its current level in August. The minutes of the July MPC meeting show that the committee is becoming concerned that the recovery is lacking momentum, with household and business confidence being hit by concerns about government cuts, ongoing worries about growth in Europe and renewed tension in bank funding markets. This led members to consider an easing in policy but the fact that the economy registered a sharp 1.1% rise in gross domestic product in Q2 2010 should allay some concerns. I still believe that further monetary loosening is unlikely and I vote for a hold.
Ray Boulger senior technical manager, John Charcol
Despite encouraging Q2 GDP and June retail sales figures worrying headwinds remain. Public spending cuts and tax increases are likely to seriously affect consumer confidence in the coming year, with concern about employment prospects having an adverse effect on consumer spending. The Bank’s draft quarterly inflation report will be available to the committee and should confirm expectations that the Consumer Price Index will remain above the target 2% for much of next year but an important factor will be the increase in VAT to 20% from January 2011. It’s much too soon to start increasing the base rate or to rule out a further rise in quantitative easing so I vote for a hold.
Vic Jannels chairman, All Types of Mortgages
The public sector net cash requirement rose to £20.9bn in June, the highest level since records began. The month’s figures show a marked fall in net investments compared with June 2009. Recent business surveys and reports from the Bank’s regional agents indicate a deterioration in growth and the MPC has considered arguments for a further easing in policy. Retail sales rose 0.7% in June compared with forecasts of 0.5%.
Strong sales figures have been attributed to the World Cup, with plenty of electrical goods being bought. Perhaps this was a poor investment, given the dreadful showing by the England team. Meanwhile, GDP data revealed a 1.1% increase for Q2, the biggest rise for two years. I vote for a hold.
Mehrdad Yousefi, Industry consultant
The strong economic growth registered in Q2 suggests that further policy loosening may be unnecessary – in fact, it may push the debate in favour of some modest policy tightening. My guess is that Q3 is not going to be as good as this. Figures released recently show banks are still not lending freely, suggesting households and businesses will find it hard to make up for the upcoming cuts in government spending. A breakdown of the figures shows that the service sector enjoyed its fastest growth in three years but a clampdown on government spending and a rise in VAT at the start of next year could dent consumer demand badly. On balance, I forecast no change in quantitative easing and vote for a hold again this month.
Fahim Antoniades group director, mortgage centre ifa
MPC inflation hawk Andrew Sentance’s view is that current monetary policy is extreme and no longer warranted, given that CPI inflation has jumped to its joint highest rate since 1997. The economy showed surprising growth of 1.1% last month and the fact that the four UK banks tested passed the Committee of European Banking Supervisors’ stress test fuels Sentance’s argument. On the other hand Ernst &Young says rates should be frozen until 2014 as the main worry is slowing government spending rather than inflationary pressure caused by the VAT rise. I subscribe to the latter view. Given that borrowers outnumber savers we can’t afford a pre-emptive start to rate rises while the economy is delicately balanced. I vote for a hold.
Peter Williams, Executive Director, Intermediary Mortgage Lenders Association, and chairman, Shadow MPC
The governor of the Bank of England clearly has no appetite to raise the base rate but in my view it has been too low for too long. The rate is becoming cemented into decisions by households and firms in ways that are unhealthy. Although low rates are enjoyed by some they have caused significant difficulties for others, including lenders which have loss-making back books and are finding retail deposits hard to raise. A negative net interest margin is no longer theoretical. Ernst & Young has called for higher rates and there are rumblings inside the MPC with respect to both the base rate and a resumption of quantitative easing. I vote for a 0.25% rise.