Mortgage Strategy’s shadow Monetary Policy Committee keeps the base rate at 0.5% as concerns about the economy, slow growth, rising inflation and an uncertain housing market maintain their grip
Mark Harris, Managing Director, SPF private clients
It is becoming difficult to write anything fresh in this space. I remain of the firm opinion that we are far from the road to recovery and that the economy remains fragile with several more twists and turns to come. Recent data, most notably the Purchasing Managers Index for manufacturing, indicates slowing growth. We can point to the royal wedding, endless April bank holidays, and the Japanese earthquake and tsunami as contributing factors. I think it is a little more straightforward the economy is stagnating, people are beginning to feel the pinch and confidence is low. The last thing anyone needs is a rate rise and I believe the existing base rate of 0.5% will be with us for another 12 months. So I vote for a hold this month.
John Cupis, Managing Director, PMS
The inflation versus growth debate has now reached fever pitch. Bank of England governor Mervyn King recently gave an early warning of an interest rate rise sooner rather than later. This was following predictions that inflation will be nearer 5% by the end of 2011. What a difference a month makes in May he said he thought rates would stay at 0.5% for some time. With fuel and commodity price increases fuelling inflation, it is hard to see how a rate rise will do anything but suck more consumption out of the economy. I foresee a worsening data set on unemployment, house prices and repossessions in the second half but this may not be enough to head off MPC members who are worried about inflation. I vote for a hold.
Robert Thickett, Editor, Mortgage Strategy
Despite the Bank’s concerns over rising inflation it continues to be a hard case to make for a rise in interest rates. The big drivers for April’s 0.5% inflation increase were seasonal rises in air transport, tax increases in alcohol, sewage collection, gas and rents. It seems difficult to see how a rate increase would exert much downward pressure on these elements, with the exception of the latter. Many lenders have acknowledged they are now sitting on bloated forbearance schemes so any interest rate rise will make it hard for them to continue with this strategy. A flood of repossessions could either put further pressure on the overpriced rental market or cause rapid deflation in house prices. I vote for a rate hold.
Dev Malle, Sales Director, Personal Touch Financial Services
The May minutes showed Monetary Policy Committee members were six to three in favour of holding rates. But the May quarterly report confirmed inflation has risen to 4.5%, the highest for 30 months. It is clear this is due to price rises for fuel and the impact of VAT. By contrast the former inflation measure of the Retail Prices Index fell by 0.1% in March. At the same time growth was at 0.5% so over the past six months the recovery has been stagnant. Wage inflation remains in control and the inflationary pressure can be isolated to concerns over fuel prices and tax increases. This alongside weak growth means the underlying state of the economy is too fragile to risk a rate increase, so I vote for a hold again.
Ray Boulger, Senior Technical Manager, John Charcol
The latest weak manufacturing figures from both sides of the pond, particularly in the UK, coupled with higher than expected government borrowing in April, adds significant weight to the view that the economic recovery is going to be protracted. Despite many economists having already revised their original 2011 GDP forecasts downward, further revisions look likely. Despite a modest increase in wage growth last month the other dire economic statistics all point to an extended period of low interest rates. This has been reflected by market yields, with five-year swap rates having now given up more than half of the increase seen since hitting their all-time low of 1.99% at the end of October last year.
Vic Jannels chairman, All Types of Mortgages
According to the Office for National Statistics net public sector borrowing was £139bn to March 2011, reducing from £156bn in the same period last year. Public sector net debt, excluding financial interventions, was £910bn to April 2011 compared with £765bn to April 2010. The government is forecasting higher gross domestic product for this year and next which is more bullish than most economists. Consumer confidence was upbeat in May possibly due to the feel-good factor from the holidays. House prices, according to Nationwide, increased by 0.3% in May while annual growth was -1.3%. Gloomy figures are expected from Halifax and the Land Registry confirming that the housing market outlook is still uncertain. I vote for a hold.
Mehrdad Yousefi, Industry Consultant
The manufacturing PMI headline index fell to 52.1 last month from a revised 54.4 in April. This was blamed on a weaker domestic market, particularly for consumer goods, the slowest growth in export orders in eight months and public holidays. Separate figures from the Bank showed mortgage approvals for house purchase fell to 45,166 in April, the lowest since December last year. These figures reinforce worries about the resilience of the economy at a time of public spending cuts, high inflation and uncertain consumer demand. Manufacturing, which accounts for around 13% of UK output, had been one of the few success stories. The PMI suggests it has moved from rapid expansion to near-stagnation. I vote for a hold.
Fahim Antoniades, Group Director, Mortgage Centre IFA
Setting interest rates is becoming like choosing between mortgage rates since one cannot predict the future, the choice becomes a matter of opinion not advice. And so it holds there are two camps within the MPC one that believes rate rises will counter inflation and one that believes it would stump growth. One MPC member, Adam Posen, is confident enough to not seek re-election to the committee if inflation doesn’t drop to 1.5% by August 2012. Domestically, the biggest threat to inflation is wage rises and my fear is that higher rates will put pressure on wages thus adding fuel to domestic inflationary pressures. I vote for a hold since I cannot envisage how increasing rates will counter external inflationary forces.
Executive Director, Intermediary Mortgage Lenders Association, and Chairman, Shadow MPC
The economy remains weak though some suggest the underlying performance in the private sector is better than the data suggests.
The cuts in spending will bite in 2011/12 so we won’t see a public sector-led recovery. Indeed the International Monetary Fund recently pointed out the scale of the cuts and tax rises are much higher compared with other countries. Consumer costs are rising, household incomes are falling in real terms and confidence is low.
Inflation remains a cause for concern and is a source of intense debate and diverging views in the MPC. But everything suggests the doves will win out this month and probably for the rest of 2011.
Little wonder the UK sees renting as more attractive than owning a home although the debate that has accompanied this has been notable for the many ill-informed opinions offered.
I vote for a hold this month