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Bank puts rates up to 5%

9th November 2006 | back to article listings BACK    print this article PRINT

Despite warnings to maintain interest rates at their previous level, the Bank of England's monetary policy committee voted today to raise rates by 0.25 per cent to five per cent, the highest for five years.

The housing market has been in good health of late, with prices increasing considerably on a month by month basis. Last week, Nationwide reported house price growth of 0.7 per cent in October, following on from a strong 1.3 per cent in September. This steady growth has meant that, a typical house is now 8.2 per cent, or £12,500, more expensive than a year ago.

However, many analysts have argued that this growth is due to structural factors within the market rather than the relatively cheap price of credit.

Yesterday (November 8th), the Royal Institution of Chartered Surveyors (Rics) said that the rise would "help to cool the [housing] market somewhat" and today welcomed a decision that it said came "in a timely manner".

Milan Khatri, Rics chief economist, said: "The modest rise in interest rates will help to cool the housing market but at the same time promote wider economic stability and prevent inflation pressures building."

He continued to predict a "soft landing" for the UK market that would give "rise to a more stable market environment for buyers".

Traditionally, supply and demand for property has indeed been determined by the cost of borrowing and so can effectively be controlled by altering rates accordingly. However, some housing experts believe that the current rate of growth is down to more fundamental factors than the price of credit.

"The Bank of England must be careful not to mistake the cause of house price rises over the next two years as being interest-rate led," argued Stuart Law, managing director of Assetz.

He explained that a chronic deficit in supply to match growing demand will determine house prices in the short-term future.

"Continued high levels of immigration into the UK, driven by the expansion of the EU to include additional countries such as Poland, Bulgaria, and Romania, will be the main source of house price growth in the next few years, rather than low interest rates which primarily drove prices up until 2005."

Martin Ellis, Halifax economist, concurred, noting: "I'm not sure it'll have a big impact."

However, he did add that the rate rise may slow the housing market but not through the cost of borrowing.

"There will be a slowdown in consumer credit growth which will contribute to a slowdown in the housing market," Mr Ellis explained.

Mr Law concluded that property prices would continue their strong growth into 2007, shrugging of the rate rise, as they did in August.

"It would take excessively high levels of interest rates to prevent the supply/demand imbalance from driving up prices," he said.

This is a press release by Assetz also available at http://press.assetz.co.uk/articles/3085.html. Alternatively, please see our full press release archive.

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