Shadow MPC

Welcome to 2012 and my first predictions for the year. In 2011 I found a different way every month to predict that base rates will stay on hold.

I believe we will face the same situation in 2012. Mortgage Strategy has kindly given me extra column inches to explain why I believe this to be the case, and to offer some sporting predictions amid the gloomy economics.

In Europe, a pre-Christmas pact was made between French president Nicolas Sarkozy and German chancellor Angela Merkel to shore up the euro. But it offered the IMF a paltry £200bn additional funding on top of the £250bn temporary emergency rescue money. This is barely enough to cover the borrowing needs of Italy and Spain for the next two years.

Without a significant political solution to ensure market confidence, wholesale funding will be squeezed, bond yields will remain high and the risk of a euro break looms closer. For us, it means a continued drought of domestic mortgage funding as lenders are forced to keep a weather eye on global funding conditions.

The UK domestic economy will limp along with GDP stagnating – some may predict recession – but it will be pretty flat. This will mask significant regional differences, particularly in house prices. The Halifax has reported that in England, Woking saw the biggest price rise in 2011 at 16%, while Kettering suffered the biggest decline at 15%. Scotland saw rises of 12% and declines of 15%.

We are now seeing economic rebalancing reflecting the changing shape of employment. This will affect lenders’ appetite to offer credit in the regions and also their approach to affordability in the run-up to the MMR.

Meanwhile, the Asian economies are starting to slow. China is likely to scrape 7% GDP growth this year and India will see 6% – almost a recession there. The UK’s meagre exporters face a tough year wherever they go.

UK inflation will start to reduce in 2012 as the VAT rate and price increases drop out of year-on-year indices. But wages will not grow much and real disposable incomes will fall again, hitting mortgage affordability.

I believe the overall impact of these and many other factors will mean base rates at 0.5% all year to soften the impact on borrowers and ensure lenders support business credit.

My personal overall predictions and wish list for 2012 include:

  • Gross mortgage lending of £135bn – similar to 2011
  • UK inflation drops to 2%
  • Cheaper European holidays as £1 buys €1.25
  • Great Britain to get at least 48 medals at the Olympics
  • Spain to win Euro 2012
  • Tottenham to win the Premiership – well, we all need a dream, and in that same vein, Harry Redknapp turns down the England manager’s job.

Good luck and have a happy and prosperous 2012.