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Holding on for better news

10th July 2008 |

Today's news from the Bank of England may pose the classic question of whether the glass is half full or half empty. While many in the property industry would rather that the base rate should fall to stimulate growth and investment, others may have feared that the monetary policy committee (MPC) would respond to rising inflation by putting the rate up again.

Following the recent increase in the consumer prices index (CPI) rate to 3.3 per cent, governor of the Bank Mervyn King wrote the mandatory letter to the chancellor required under Treasury rules, in which he gave no clear indication as to how the MPC would respond in policy terms. In fact, he stated that it was "uncertain" what the best course of action to help bring the rate back to two per cent will be.

For this reason, there was always some reason to suspect that the MPC would hold the rate this month as part of a strategy of waiting for more data to emerge in the coming months. As is always the way of these things, the question of whether the MPC was largely or entirely united in this decision, or split down the middle, will not be made clear until the minutes are produced on July 23rd.

Reaction from the housing industry has varied. Seamus Kavanagh of property group Badger Holdings declared himself to be "extremely disappointed" at the decision. He added: "At a time when the market is already struggling in an effort to combat inflationary pressures and consumer confidence and spending is clearly already down, a reduction in interest rates would have helped enormously, however, it seems that the Bank of England are currently unwilling to offer any lifelines."

This reaction made no reference to the other pressures the Bank is facing, not least from its central remit of trying to keep inflation at two per cent. While the press release from Badger Holding's carrying Mr Kavanagh's comments described the firm as "incensed", the Royal Institution of Chartered Surveyors (Rics) took a long-term view of the situation. Chief economist Simon Rubinsohn accepted that the decision was "understandable given the ongoing concern about the inflation outlook", but added that an easing of the inflationary situation "will justify an easing in policy later in the year".

Yet the way to get the property market going again may not lie in the base rate situation anyway. Mr Rubinsohn repeated a recent proposal by Rics to reform stamp duty with a marginal system that does not see the rate of tax leap up at each threshold. Badger Holdings also repeated its recent idea of a stamp duty holiday. To add to this, the National Association of Estate Agents, drawing attention to the recording of another house price fall by Halifax, argued that stamp duty for first-time buyers should be abolished.

Therefore while the level of the base rate may continue to be of interest to investors, buyers and sellers, the potential for it to remain static may focus attention more on other [potential measures, with pressure increasing on the government to act and boost the property industry as a result.