THIS MONTH’S DECISION: HOLD

Mortgage Strategy’s shadow Monetary Policy Committee is united in again voting to hold the base rate amid concerns about inflation and declining growth figures

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Mark Harris
Managing Director, Savills Private Finance
Decision: Hold

In the next few months, we will see increasing pressure on the Monetary Policy Committee as interest rates become front-page news.

Rising inflation has come as no surprise and it is expected to go higher, perhaps touching 5%. But will a base rate increase do anything to curb inflation? I doubt it very much.

It is time to hold our nerve and let inflation fall back of its own accord. Any rise in interest rates will have a huge impact on the millions of homeowners on variable rates, with lenders sure to pass on these rises. Those with tracker mortgages will see the increases immediately.

The recovery is finely poised. As Sir Alex Ferguson famously said: ’It’s squeaky bum time’.

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John Cupis

Managing Director, PMS

Decision: Hold

The shock GDP growth figures for last quarter at -0.5% couldn’t have come at a better time for those who think the economy is not yet in recovery. With inflation heading for 4%, growth going backwards and still a huge budget deficit, there are already calls for a new economic approach.

I believe the government must push on with reforms to pay back debt and keep calm during what the Bank of England governor Mervyn King has described as a long haul.

Increasing rates now will have little effect on consumers, who will face rising oil and commodity prices. But some will be wanting to signal to consumers that rates will rise soon.

We should look carefully at Q2 data for signs of change.

Dev Malle
Sales Director, Personal Touch Financial Services
Decision: Hold

Previously, I suggested that the inflation loonies would press for a rate rise. Now, with inflation at 3.7% and two MPC members voting for a rate rise in January, they must feel it’s a done deal.

Instead, I think you will see the clearest indicator yet that the banks’ unofficial remit has extended to ensuring we don’t fall back into a recession.
Disappointing negative growth confirmed that the economy remains fragile. With increased unemployment and spending cuts yet to bite, this fragility is further exposed.

In the short term, VAT and fuel costs are pushing up inflation artificially. This must be balanced against a weak housing market and wage rises being pegged back this year.

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David Finlay
Intermediary Business Director, Barclays
Decision: Hold

While the Bank of England faces an unenviable dilemma, we expect monetary policy to remain unchanged. Inflation rose to 3.7% in December, almost twice the target rate, and is expected to rise even further over the next few months.

Many commentators have begun to question the MPC’s commitment to hitting the 2% target, suggesting inflation may be out of control. But with the economy having contracted in Q4 2010, the argument that underlying inflationary forces are weak has gained credence.

“When in doubt, do nowt” is likely to be the MPC’s guiding principle in February, so Bank base rate will remain at 0.50% and it will keep quantitative easing unchanged.

Ray Boulger
Senior Technical Manager, John Charcol
Decision: Hold

The two most significant economic numbers released post the January MPC meeting were the inflation figures, with the annual Consumer Price Index up by 0.4% to 3.7%, but a much more muted increase in the Retail Price Index. There is worse to come but good reason to expect a sharp contraction early next year.

The Office for National Statistic’s estimate of the 2010 Q4 GDP at -0.5% will increase speculation about an early Bank base rate rise. Even though the snow will have negatively affected this figure, early signs for 2011 Q1 are not good with consumer confidence plummeting.

I vote for no change in Bank base rate or the size of the quantitative easing programme.

Vic Jannels
Chairman, All Types of Mortgages
Decision: Hold

Growth in the final quarter of 2010 was much lower than expected and inflation continues to rise, promoting the popular view that the base rate needs to rise in order to check this.

Economists seem to be at variance over when, or if, base rate will rise. The latest MPC minutes showed six members voted to keep the current Bank rate and maintain the asset purchase programme. Three members voted against.

Many pundits seem to think the Bank of England will keep base rates on hold this year as the fiscal squeeze starts to kick in and the loss of public service jobs is just beginning. Some argue that a small rise will create a helpful correction.

I vote for another hold in rate this month.

Mehrdad Yousefi
Industry Consultant
Decision: Hold

At 3.7%, inflation is far from historic peaks but well above US levels of 1.5% and the eurozone rate of 2.4%. The 0.5% decline in GDP in Q4 2010 complicates life for the Bank of England, which has come under fire for failing to keep a grip on inflation.

Construction and service sector output both posted big quarterly falls, the former dropping by 3.3% to record its biggest quarterly decline since the start of 2009.

I think the data, downbeat consumer confidence and subdued housing and lending markets confirms that this monetary stimulus is still required for now.

I vote for a hold but if recovery picks up in coming months, expect the MPC to act sooner than expected.

Fahim Antoniades
Group Director, Mortgage Centre IFA
Decision: Hold

Angel Gurría, the OECD secretary general, argued in favour of the UK’s austerity measures and the need to keep rates low.

He said low interest rates are a way to stimulate growth and attract investment and the UK’s inflationary pressures are a result of a weak sterling and food and energy prices. If you stripped these out, underlying inflation was about 2%.

So there has to be a distinction between inflationary forces that can be curbed by interest rates and those that cannot. Raising Bank base rates will not stop oil hitting $100 a barrel because of turmoil in the Middle East, for example.

We need to stay the course, not panic over the inflationary smokescreen and keep rates on hold for now.

Peter Williams
Executive Director, Intermediary Mortgage Lenders Association, and Chairman, Shadow MPC
Decision: Hold

The MPC is between a rock and a hard place regarding rate decisions.

The recent bad news on the economy would lead them towards leaving rates alone, not least because some of the numbers are subject to revision but it was only for one month.

At the same time, there is some evidence to suggest a recovery is under way.

We know inflationary pressures are growing, though again the view is that some of the drivers will drop out of the measure soon.

As I anticipated, there is growing evidence that households do now see low rates as normal and this will add to the problems we face, with the inevitable adjustment upwards.

In my view, that process has to begin soon for a variety of reasons.

But I would like the clarity another month may bring to take that decision.

I thus suggest rates are held and I would expect the MPC to actually agree that.