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The cutters dilemma

29th August 2008 | back to article listings BACK    print this article PRINT

With the exception of the hawkish Professor Tim Besley, it is hard to find anyone who advocates or expects the Bank of England's monetary policy committee (MPC) to raise the base rate soon, either in its September meeting or any other time in the near future. But when there may be a cut is a different matter.

A poll by Adfero of nine economists and other experts found a unanimous forecast that there will be no change from the five per cent rate, which has stood like a rock in a storm at five per cent while the wind of inflation and the rain of economic slowdown have swirled around it. In the midst of this maelstrom one MPC member has talked of ending a drought, one has warned of a flood and the rest have simply clung to the rock, waiting for the skies to clear.

In contrast with Tim Besley's position stands David Blanchflower, the arch-dove who has consistently advocated a cut. His normal position is to vote for a 0.25 per cent reduction, but in an interview with Reuters he suggested he may go further on September 4th.

He said: "I've obviously voted on quite a number of occasions now for small cuts but we need to act and we probably need to act in larger amounts than that. We need to actually get ahead of the game and it appears that we are now behind."

Mr Blanchflower went on to state that the debate about inflation was "short-sighted" in the light of concerns about slowing growth and potential rising unemployment, although he had not managed to convince his colleagues of this.

Those investing in property may have two possible views on this situation. If the base rate remains where it is, it will prevent a faster reduction in the cost of mortgages, increasing the chances of a continuation of the recent trend in which people have opted to rent rather than buy. Such a situation would be good news for existing landlords hoping to avoid rental voids.

For those looking to make new acquisitions using buy-to-let mortgages, the situation may be not so promising. However, better times may yet be ahead. One of the nine polled by Adfero, chief economist at the Institute of Directors Graeme Leach, said "we think the bank will definitely be cautious about moving too early," but stated the next move will certainly be down.

In one sense, this may reduce the rate question to a phoney war, in which Tim Besley becomes more isolated and David Blanchflower less so. Indeed, if the worst predictions of Mr Blanchflower come true, a series of rate cuts could be in the offing in a bid to get the economy back on track, something that may just start the reversal in the fortunes of the property market that so many have been waiting for.

This is a press release by Assetz also available at http://press.assetz.co.uk/articles/4351.html. Alternatively, please see our full press release archive.

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