By Chris Hulme
Recently, the latest meeting of the MPC took place and inflationary pressures have put paid to a cut in the rates. We should, perhaps, bear in mind that the economic environment counterbalances these pressures and is limiting any option to increase the rates at this time.
July's MPC meeting saw an even split in the voting by the nine members, seven voting to keep rates at 5%, one voting for a 0.25% cut and one for a 0.25% increase. As such, this month’s decision raises no eyebrows and pretty much meets the expectations of many commentators. I would expect to see a similar voting pattern emerge when the minutes of the meeting are released on August 20th.
This morning’s news sees inflation break through the 4% mark, now standing at 4.4%, a significant increase from July. Still driven by the recent high costs of fuel and energy, inflation shows no sign of slowing and recent announcements from other utilities suppliers of costs increasing above inflation over the next 5 years could add to these woes.
The cries from Mr Darling and Mr King for us all to be 'reserved' in our quest for higher incomes and inflationary based pay rises to combat increases in our own personal expenditure provides no comfort for the British public and demonstrates a severe loss of control of the economy by the Treasury and the Bank of England.
The trade union strike actions by Unison for inflationary based pay rises for its members in the public sector puts pressure on the public purse and on the mantra of resisting such pay awards - it will be interesting to see the results unfold through the balance of 2008.
We could therefore see inflation escalate further and I would not be surprised to see a rate increase in September, although I feel the economy could hold out until later in the year before such action would be needed.
Alistair Darling’s recent 'leak' about his potential plans for the temporary removal or deferment of Stamp Duty payments to stimulate the housing market has (until he makes a decision) stifled the housing market even further, causing many sales to fall through since the weekend.
The route issue here is that whilst there is a glimmer of hope of a saving or deferment of Stamp Duty payment (£9,000 on a £300,000 property purchase) buyers quite rightly want to find out whether they will qualify for this 'support' and are either pulling out from buying or delaying completion of their purchase. My concern here is that Mr Darling is not known for being a 'decisive' Chancellor and we could be waiting for some months before a decision is made. By that time, it could be all too late, as the void between economic growth and controlled inflation grows ever deeper.
As discussed previously, whilst we do not expect the Bank of England base rate to fall, the disparity between the pricing of mortgage products and the Bank of England base rate still remains. However, we are starting to see this reduce, with many lenders reducing their product pricing across the board as the money available to them on the Swap markets now starts to fall.
Where we see increases in rate from the Bank of England of up to 25 basis points, I would still expect that lenders could absorb this increase naturally and would price mortgages accordingly - at least for a short time.
A year ago, a good 2 year Tracker product would be tracking at, or a little below, the Bank of England's base rate. Recently we have seen these products at a margin in excess of 1% above the base rate. Yet, as I write today, lending at below 75% of the property value is dipping towards 5.75%. Interestingly enough, Northern Rock are one of the front runners in this product pricing, being one of the most competitive lenders on 2 year Tracker and 2 year Fixed rate products.
The official press release from the Bank of England is available via the link below.
http://www.bankofengland.co.uk/publications/news/2008/044.htm
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