Assetz® News - The rate battle ahead

The rate battle ahead

31st July 2008 |

Those looking to invest in property who are hoping for a cut in interest rates soon, partly to bring mortgage rates down but also to boost the whole economy and avoid the sort of economic downturn that could damage the market, may have been a little confused of late to find that, while the majority of the Bank of England's monetary policy committee are sure the best thing to do just now is sit tight and hold the base rate, two of them have contrasting alternative ideas.

In the dove corner is David Blanchflower, who has been the one member to vote for a rate cut on each of the last three occasions since the majority did so in April. Speaking yesterday on BBC Radio Ulster, he suggested that the MPC should change tack now in the light of some worsening economic statistics, Bloomberg reports.

He said: "There's been fairly bad news on retail sales and on a number of things. So we're going to reconsider and take another vote." Mr Blanchflower has recently said the UK is already in recession and that as a result it is economic decline, not inflation, that risks being too severe.

But how much the rest of the MPC will reconsider is in doubt, according to the 38 economists Bloomberg polled about the August decision, all of whom predicted another hold decision.

One man undoubtedly not backing the case for a cut is arch-hawk professor Tim Besley, who made it a three-way split by voting for a rate rise on the basis that it would be worse in the long run if inflation was permitted to soar too high.

Speaking to the Daily Telegraph this week, Professor Besley reiterated his opposition to a cut despite the negative implications this may have for economic growth, stating: "Are rates restrictive? They are mildly restrictive, yes. But, given the prospects for inflation, a mildly restrictive rate is justifiable."

He also dismissed suggestions that the remit of the MPC should be altered to allow a looser monetary policy to operate in order to stimulate growth, commenting: "It would seriously undermine the credibility of anti-inflation policy in the UK if at the first time we face tough conditions there is discussion of changing the objective."

Clearly the views of Tim Besley and David Blanchflower are presently irreconcilable, so the question is which of these views will ultimately find favour with the rest of the MPC?

In the view of Nationwide's chief economist Fionnuala Earley, it will be Blanchflower's. Commenting on the lender's latest house price figures, Ms Earley said that while the economy currently faces the twin problems of rising inflation and slowing growth, it will be the latter factor which prevails, leading to a cut.

She stated: "In our view the latter effect [slowing growth] will begin to dominate, eventually giving the MPC enough comfort to begin cutting rates."

At the same time, Ms Earley has pointed to the falls in swap rates and the consequent cuts in mortgage rates, commenting: "As the cost of mortgages begins to come down, activity could be bolstered and restore some liquidity to the housing market."

While she stated an "overnight" recovery is not on the cards, Ms Earley predicted that the very fact this was so may mean that these recent cuts will combine with the ability of the Bank to make "rapid" cuts in time. So while Mr Blanchflower may not have so much backing for his view either in the MPC or at Nationwide, should the views of Ms Earley be replicated by others at the Bank of England the next rate move should be down and not up.