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Unanimity reigns

22nd October 2008 | back to article listings BACK    print this article PRINT

Those hoping to see recoveries in the economy at large and the property market in particular may have had mixed feelings about the speech made in Leeds last night by Bank of England governor Mervyn King, in which he said it is "likely" that Britain is entering a recession.

While this may sound like bad news all round, it may also be far from a surprise. Only this week the Ernst & Young Item Club said as much. But the club also predicted the downturn would be "short and shallow", with one key reason being a more stable banking system and another being low interest rates.

With the first being important in terms of the liquidity needed for mortgage lending and the second helping to cut rates - for those on tracker deals at the very least - investors may be able to take considerable comfort in other comments emanating from the Bank of England in the past 24 hours.

Earlier in his speech, Mr King suggested that the recent recapitalisation of the banks was a critical move, influenced by the experience expressed "with eloquence and not a little passion" by central bankers in Japan, Sweden and Finland who had dealt with similar problems in the 1990s. The governor said that this action will retrospectively be seen as the moment "when we turned the corner".

Stabilisation, then, may be the prospect for the financial system. As for interest rates, it may have been taken as a less than positive sign for those hoping for rate cuts if there had been any dissenters in the monetary policy committee (MPC) against the decision to trim half a per cent off the base rate.

However, the minutes today showed that all nine members voted for the move. Moreover, when assessing the inflation situation, the minutes declared that "the balance of risks to inflation in the medium term had shifted decisively to the downside" in the month leading up to the meeting. They also stated that factors such as wage inflation were weak, while the downturn in the economy and the low price of commodities (particularly oil) would further curb price rises.

In such circumstances, it may be that the MPC expects the level of inflation to fall back enough to allow it to make several more rate cuts soon. The next decision - due on November 6th - may contain some belated fireworks, but the quarterly inflation report in November may contain a deeper insight into the longer-term prospect for the MPC to play a part in generating the conditions for a property market recovery.

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