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Economy too tender for remortgage revival

The US Federal reserve is widely expected to increase its quantitative easing this week with some reports suggesting it could be up to $1 trillion.

This poses the Bank of England’s Monetary Policy Committee with a conundrum because while the US recovery is faltering the UK recovery is better than expected.

With Q3 2010 growth figures of 0.8% and Q2 figures of 1.2% the UK economy has confounded the pessimists to grow at a high rate.

But the dependence on construction and the effects of the Labour stimulus won’t last forever and the spending cuts are looming.

Public sector job losses could result in very high unemployment if the private sector doesn’t pick up the slack.

This would reduce the tax take, reduce consumer spending power, increase the deficit and send the UK into a spiral. That is the danger the government faces.

So spending cuts and a faltering US recovery mean that last week’s growth figures may well be the last good news surprise for some time on growth.

And this means that monetary policy must be used as a stimulus – so more QE and no interest rate rises.

When asked if he has a plan B for the economy if the recovery stutters under pressure from spending cuts, George Osborne refers to the Bank of England for stimulus.

He is relying on the MPC to help his spending cuts succeed without damaging, or at least limiting the impact on, economic growth.

In last month’s MPC meeting there was a three way split with Andrew Sentence again voting for a rate rise, Adam Posen voting for more QE and the rest voting for no change.

The MPC is finely balanced at the moment but this will have to change at some point.

The next step it must take is to increase QE to £250bn, as Posen wants.

But this is not likely to happen next month as the MPC waits to see the effect of the US action.

But it seems clear that as the spending cuts bite monetary policy will have to be loosened further to boost the economy.

Remortgages stood at a 10-year low of 25% of the market in August according to the Council of Mortgage Lenders and with historically low interest rates it doesn’t look like increasing any time soon.

The remortgage revival will come but right now the economy is just too tender for interest rates to rise, even slightly.

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