Low interest rate is the right medicine


Although the housing market got off to a good start this year it is not roaring ahead.

Systemic funding difficulties persist and consumer sentiment remains fickle. If UK plc is no longer in intensive care, then it is in remission with scope for prescribing more medicine.

Consumers feeling wary will not be cheered by the looming tests for the financial sector over the coming months. Basle III and the end of the Special Liquidity Scheme are just two of the capital demands that may impact willingness to lend.

Remarkably in some quarters you can still hear calls for a rise in interest rates, which mercifully fall largely on deaf ears at the Bank of England. It’s not hard to see why.

Property prices may be levelling, although not uniformly across the country, but there is still enough nervousness about the UK’s future economic performance to make such a move unpalatable.

Fiscal tightening is perceived in policy circles as a more effective way of controlling spending and salaries without causing a tsunami of repossessions and a further crash in confidence.

The case for raising rates becomes even thinner when you consider the likely reaction of lenders to such a move. A rise of 0.25% could precipitate a rise of 0.35% on many variable rates.

The rays of sunshine are breaking through in terms of LTVs, more products, repriced fixed rates and more sensible criteria. But calling for monetary tightening now would be akin to discharging the patient while still connected to life support.