Interest rate climate change

The interest rate climate has changed during the past two weeks, latest research from Bristol & West reveals.

Bristol & West say that US economic growth in the third quarter proved to be weaker than expected,although the annual growth rate of 3.0%represents a sound recovery number.

The consumer is the main driving force in both American and British economic recoveries.

Financial markets therefore received a shock last week,when the October survey of US consumer confidence showed a massive fall in the confidence index to the lowest level for 9 years.

Market fears of a setback in American recovery were exacerbated by a rise in the employment rate – by 0.1% to 5.7%.

As a result of the weaker than expected US data,money markets now discount a 0.25%reduction in US base rate,to 1.50%,at today&#39s Federal Reserve Board (FRB)meeting.

Should the US FRB reduce rates this week,there is a distinct probability that the Bank Of England&#39s Monetary Policy Committee (MPC)will follow suit.

This reflects concern that sterling might appreciate significantly if the MPC left rates unchanged following a US rate reduction.

Such an appreciation would have an adverse impact on the UK manufacturing industry,at a time when demand in our US and Eurozone export markets appears to be slowing.

The MPC will need to balance this factor against strong UK consumer demand.

In respect of the UK economy as a whole,economic growth in the third quarter was marginally higher than expected at 1.7%.The MPC did not have this data when they last met and voted 6-3 for no base rate change.

A key aspect of their deliberations was the risk that equity market weakness would depress consumer confidence.

Equity markets have since recovered – FTSE 100 rose 300 points in October.

Nonetheless, the bias towards easing,evident in the latest MPC Minutes,will probably tip the balance in favour of a 0.25%reduction, if the US authorities reduce base rate on Wednesday.

The housing market boom continues,as evidenced by the 24%annual increase in the Nationwide house price index (Halifax data will be published this week).

The key driving forces behind house prices are personal incomes and interest rates.

It appears that the MPC is about to provide a further boost to thehousing market.

Fixed rates are also easing in anticipation of a base rate reduction,although not to the same extent as very short term money rates.

A B&W spokesman says: “The UK interest rate yield curve is very gradually steepening.The next few weeks could provide an opportune time to lock into fixed term mortgage rates, close to the lows of the year.”