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Shadow MPC

With uncertain economic times ahead, the Mortgage Strategy GE Money Home Lending Shadow Monetary Policy Committee is in favour of holding the base rate at 5.50% to see what the effects of the recent rises will be as they feed through the economy

Melanie Bien, director, Savills Private Finance
The Monetary Policy Committee was unanimous in its decision to raise the base rate in May. Indeed, some members pushed for a 0.5% rise. The market reacted by pricing in a further rate hike of 0.5%, with two-year swap rates breaching the 6% mark. The question is not if rates will climb further but when. I’m opting for a hold this month as the MPC continues with its wait and see attitude, assessing whether the rate increases in the past 10 months will have the desired effect. The outlook for inflation is uncertain although housing activity indicators show some signs of slowing. However, if the economy continues to develop broadly in line with expectations, there could be another 0.25% rise in July or August rather than June.

Vic Jannels, chairman, All Types of Mortgages
It is too soon to assess the impact of last month’s rate rise. Recent figures suggest inflationary pressures in the economy remain, particularly in strong commodity prices. Retail sales have strengthened, with total sales volumes in the three months to April 2007 up 4.8% on the same period last year. While earnings continue to outpace inflation – with average earnings excluding bonuses rising at 3.7% in March – the trend in the employment rate is falling. Consumer indebtedness remains high and the housing market is beginning to show signs of weakening. The Building Societies Association saw a fall in mortgage approvals of 0.7bn to 3.9bn from March to April while the British Bankers Association calculates that net lending in April fell to 5bn from an average of 5.4bn. I say hold.

Christopher May, director, The Mortgage Times Group
With last month’s unanimous decision by the MPC to go for a 0.25% rate hike – the first undisputed vote since August 2004 – and a few members considering a 0.5% rise, it is clear that rates will increase again in the next few months. The MPC has made the unusually definitive statement that further rate rises will come sooner rather than later in line with expectations concerning inflation, with continued upward pressure on house prices despite the recent base rate rises. With oil prices hitting $70 (39.20) per barrel and upward pressure on wage inflation in evidence, another base rate rise will come about at some time. But my decision is to hold this month and wait and see how inflationary pressures work themselves out.

Dev Malle, sales director, Personal Touch Financial Services
Last month, I voted for a 0.5% increase in interest rates as I believed the shock would curb inflation and consumer demand and allow the economy to settle. A stream of 0.25% increases would do more damage, introducing uncertainty and costs in the mortgage market through continual repricing. If inflation was suppressed beyond the target of 2% it may not be a bad thing so a deflationary risk is avoided. However, it is becoming clear that the housing market is steadying, even though this does not seem to have been reflected in consumer demand. I believe a further rate increase now would do more harm than good and present a picture of a lack of control. My decision is to hold rates until the effect of the May increase can be judged.

Ray Boulger, senior technical manager, John Charcol
Before deciding whether a further rate increase is necessary, time is needed to evaluate the impact of the four rate increases in the past 10 months. As well as strong indications that the Consumer Price Index will fall further in the next few months there are signs that the three base rate increases between August and January are now affecting the housing market, although figures are distorted by people putting their properties on the market earlier than they would otherwise have done to avoid buying Home Information Packs. But the most important statistics in assessing the strength of the housing market are new mortgage approvals and lending for purchases. These started slowing five months ago and the latest figures from the Council of Mortgage Lenders show that the number of new loans is now below last year’s figure.

Peter Williams, executive director, Intermediary Mortgage Lenders Association
This is a difficult call. Many suggest all the evidence points to a fall in inflation over the coming months while others suggest the Bank of England is still behind the curve and must act now to regain control. From a housing perspective, there is some evidence that the market is slowing and that was echoed in the BoE’s regional agents’ reports. Mortgage figures suggest stability or decline and the MPC itself noted that only about half the rate change has fed through to average mortgage costs so far, reflecting fixed and discounted mortgage rates. Given that the effects of the recent rate rises are still working through and the forward view of inflation suggests it will decline, I vote in favour of a hold to allow the picture to clarify further.

Jim Cunningham, economist, Council of Mortgage Lenders
The policy dilemma continues. Interest rates continue to rise along the yield curve, reducing housing affordability. The monthly number of first-time buyers relative to the same time a year ago has been falling since late last year and the number of movers is lower than a year ago. The trend in mortgage approvals is downwards and this is unlikely to change until there is a widespread belief that interest rates have stabilised. But the economy remains robust. Although inflation will fall in the months ahead, new pressures such as rising food prices could become embedded. This will cause rates to remain higher than they would otherwise have been, and for longer. So to limit volatility in output and inflation in the medium term, I vote for a further 0.25% rise in interest rates this month.

Fahim Antoniades, director, Quantum Mortgage Brokers
DECISION: +0.25%
Last month’s minutes showed the MPC was considering a 0.5% increase which would have been the first such rise since 1977. This illustrates just how seriously the MPC is taking inflation figures. Economic data showing food price inflation at 6% – well above the 2.8% target and above the European average of 2.5% – will no doubt exacerbate the MPC’s inflationary worries. But the main driver is the fact that the annual growth rates of money and credit are in double digits and while credit approvals are easier than ever and borrowing rates are still relatively cheap, consumer spending will be difficult to curb. Hence, even though house prices are high, cheap money means we are still far from the affordability stress levels of the early 1990s. I vote for a 0.25% rise.

Colin Shave, chief executive,GE Money Home Lending, and chairman, Shadow MPC
The base rate is at a six-year high. Although many people expected Mays hike, the rate could have risen to 5.75% in a single bound. It is uncertain whether we need a further rise in the short term. The Consumer Price Index eased to 2.8% in April from 3.1% in March and the Retail Price Index a more accurate reflection of the costs faced by households fell by a similar amount to 4.5%, partly due to falls in fuel costs. Pay growth eased in March and average earnings rose by 4.5% compared with the same period a year ago, boosted by the number of people registering for benefits, which fell for the seventh month in a row to 890,000 in April. Some pundits are calling for a rate base rise in June but given that there is still some uncertainty over the effect of the last rise, it is prudent to hold rates this month and wait to see how the picture develops.


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