Assetz® News - Base Rates to Be Held Again at 0.5%

Base Rates to Be Held Again at 0.5%

5th July 2009 |

When the Bank of England monetary policy committee meets again next Thursday, I fully expect base rates to be held again at the historically low 0.5%.

These rates are doing wonders for property investors' portfolios and their cash flows and the numbers of investors benefiting continues to increase as people come off fixed rates on to very low variable rates in most cases.

What will be discussed at the next meeting, or at least by the end of August when the next inflation report is out, is how much more quantitative easing will be required to revitalise the economy. Much of this money, and it is about 99% according to some reports, has gone into the financial sector (banks' balance sheets etc) rather than the easing of corporate and consumer finance.

Certainly most of the business people I see every week have not exactly seen banks throwing money at them so far but they seem to be getting more optimistic about this happening in the near future. I don't buy into the quantitative easing carried out thus far being definitely inflationary, but it is a risk. If quantitative easing is taken from the £150 billion limit currently imposed up to £250 - £300 billion that some people are promoting, I think it's pretty likely a lot of this money will go in the direction of companies and consumer finance and we could then see significant future inflation and accompanying base rate rises.

With house prices now having stabilised, banks are clearly taking a much lower risk providing greater numbers of mortgages on better terms/loan to values and this is why I believe bank lending will increase much more significantly now. In addition, although the confusing downwards adjustment to first quarter 2009 GDP figures last week took people's attention away from the rapidly improving economy in the second quarter, the UK economy is nonetheless improving strongly from what I can see - there is a stream of data suggesting the economy has bounced back strongly here in the UK although it is not the same for Europe and the US. If this continues and gets confirmed in GDP data for the second and third quarter this year, we will again see an increase of lending into the corporate sector in particular as the risk of this type of lending reduces.

I'm hearing from a lot of friends running companies in different industries that the running down of stock (by pausing purchase orders) seems to have disappeared almost entirely from the economy with most companies now needing to have to place orders again. I'm not convinced they're running up inventories but they are certainly making sure they have got enough stock to satisfy orders. This is enough to produce significant sales increases and indeed profit increases at these companies that I can see as they have cut costs significantly and even a moderate increase in orders is producing a very significant profit. These orders my friends are talking about are coming out of their customers like Honda, as well as the housebuilding industries, so we're seeing this positive change in the worst-hit sectors so things are probably even better in sectors not as badly impacted. This is all good news.

I currently think we're going to see a substantial bounce out of this recession, contrary to most people's views. The thing about short, sharp shocks is that I believe it is much less likely to have an impact on people's long-term attitudes and sentiment than a very long and painful period -that's what we just had for most of the economy over the last nine months and I suspect people and companies alike will have a far smaller attitude change from this painful but short impact than economists are expecting. The long Depression in the 1930s actually managed to permanently change the thinking of an entire generation who never recovered from the idea of the world being a place of limitations and risk rather than abundance and opportunity. Looking backwards, this recession will probably be seen as a short and unpleasant period that rapidly diminishes in most people's memories. It won't be business as usual after this recession, but neither will it be a whole new world as people have said - just look at the rebound in banking sector bonuses, they don't want to admit it too loudly, but bank's profits are going to be stunning over the next few years and bonuses are really looking very buoyant - much to the indignation of the politicians, Bank of England and many others.

What does this mean? We still believe interest rates will rise sooner than most commentators think because we think the economy will recover quicker than most commentators think. Enjoy the low base rates while you can.

This news story has come from the property investment blog by Stuart Law, CEO Assetz plc.