Shadow MPC: Which way for interest rates?


A rate cut would encourage borrowing but, if sterling suffers further, the MPC may intervene to prop it up

What a difference a year makes. Last summer I wrote for this column, where I said conditions were improving and a rate rise could occur in 12 months.

That view would not be taken so seriously today, with the impact of the Brexit vote resulting in a worsened economic outlook literally overnight.

Sterling, equities, and bonds have behaved very erratically since the result was announced, and there is considerable uncertainty over their long-term performance.

While housing is typically seen as a safe bet, the market has also been affected by the vote. Anecdotally, commentators suggested that many buyers and sellers were holding off on transactions until the results were known, and this quiet period is likely to be extended by the huge political uncertainty.


Status quo

The minutes from the Bank of England MPC meeting on 15 June show that the committee itself voted to remain with its tried-and-tested approach of keeping the base rate at 0.5 per cent.

Consumer Price Inflation, at 0.3 per cent in June, was far below the MPC’s 2 per cent target, and the committee was also concerned about the slowdown in housing transactions (which were driven by buyers’ and sellers’ Brexit fears). As seen so often in recent years, the committee therefore opted to stick with the base rate status quo in the hope that this would support a continued recovery in the economy and housing market.

Interestingly, the minutes also suggested the committee could be forced to reduce this rate in the event of a ‘leave’ vote, with 0.5 per cent seen as potentially too high for the ups and downs of a post-Brexit landscape.

Now that these fears have come to pass, a reduction of the base rate to 0.25 per cent seems the course of action the MPC is most likely to take as it seeks to keep the economy in balance.


Open for business

However, circumstances could still force a rate rise quicker than anticipated. Sterling has suffered over the past week and this has been compounded by political uncertainty. Many predict the MPC will be forced to intervene and prop up the currency.

Similarly, pressures around savings rates and pensions could also lead to the MPC raising the base rate much faster than people think.

A rate cut could be positive for the housing and mortgage markets. Assuming that Brexit does not have a severe impact on lenders’ borrowing costs, mortgage rates could go down even further, encouraging borrowing and giving transaction rates a boost.

However, if the base rate goes up and borrowing becomes more expensive, market activity could be suppressed. Given the committee’s concern about the rate of residential property transactions, the impact of a rate rise on the housing market is likely to feature prominently in their decision-making process either way.

The result of the referendum has almost certainly altered the course of UK monetary policy, and along with it that of the housing and mortgage markets.

While interest rates could still have gone one way or the other in the event of a remain vote, the pressure for change would have been less immediate. Instead, with the country now in a much less certain economic position, the MPC is more likely to be compelled to act quicker.

The mortgage market now finds that its outlook is rather less predictable, and lenders might be forgiven for acting cautiously.

Looking further into the future, the outlook still remains positive and the UK is still very much open for business. The market’s fundamentals will support continued lending and housing activity. Buyers and sellers can only hold out on acting for so long, and a shortage of readily available supply should prop up prices.

It may not be an easy ride, but the market will pull through.

Peter Williams is executive director of Imla