We have reached a delicate point in the long road to recovery, with recent activity in the housing market a good sign. But the situation could easily change and the focus has moved from rates to interpreting data and prospects for the economy
THIS MONTH’S DECISION: HOLD
The Monetary Policy Committee is meeting on May 10 and is unlikely to change interest rates or quantitative easing.
In many respects the focus has shifted from these measures. It is over three years since we last changed rates – the base rate dropped to 0.5% on March 5 2009 – towards the interpretation of the data and the underlying prospects for the economy.
The evidence, as summarised in the minutes of the April MPC meeting, suggested there was evidence of growth in the economy despite the pessimistic numbers from the Office for National Statistics. The Bank of England’s recent regional agents report supports this view of modest growth and unemployment has started to fall. A double dip recession and persistent relatively high rates of inflation remain key points of debate but there seem to be the first glimmers of hope.
This downturn has been a long one by historical standards and there is a suggestion this relates to the scale and complexity of the interventions made in recent years, making prediction even more difficult than normal.
The debate about the quality and complexity of the data is also true of the housing market where we continue to get mixed signals. Although the Council of Mortgage Lenders’ commentary on the regulated mortgage survey up to January showed little evidence of greater first-time buyer activity, data published in April refers to an 8% increase in the number of first-time buyer loans taken out in February. Other CML data also refers to a 30% rise in gross mortgage lending since February and a 17% rise from March 2011.
Certainly there is agreement that we have seen more activity in the housing market, whether prompted by Stamp Duty changes or not. Transactions picked up in 2012 and the recent survey from the Royal Institution of Chartered Surveyors also suggests more agents are feeling positive, a position echoed in a number of house builders’ annual reports in recent weeks. The issue in part will turn on the supply of mortgage finance and the funding position of lenders, which remains under pressure.
All this suggests some recovery but it is delicately poised and could be reversed. At this stage the Bank is going to remain cautious. In 2011, Bank governor Mervyn King was hinting at rates at around 1.25% by the end of 2011 and we are still on 0.5%. But if the signs of growth are consolidated and sustained the MPC will be giving greater attention to pushing rates up, not least to bring inflation under control.
Higher rates might help boost savings and funding but it would put increased pressure on households. As always it is a delicate balance but we seem to be moving closer towards a tipping point.
Executive Director, IMLA
Sales director, Personal Touch Financial Services
Chairman, All Types of Mortgages
Managing director, PMS
Chief executive, SPF private clients
Senior technical manager, John Charcol
Managing director for mortgages, Barclays
Group director, mortgage centre ifa