The Bank of England’s (BoE) Monetary Policy Committee (MPC) voted to maintain the Base Rate on 6 July.
With concern over the American market, highlighted by recent rises in the US Federal Reserve and European Central Bank, a number of commentators have pointed to a rise in Base Rate. Despite no rate movement for the 11th consecutive month, many industry commentators believe an upwards movement is likely before the turn of the year.
Mehrdad Yousefi, head of intermediary mortgages at Alliance & Leicester (A&L), was unsurprised by the July results, but admitted a future rise in Base Rate could not be ruled out. He said: “Despite a number of global uncertainties, it comes as no surprise that the Base Rate remains unchanged this month. However, the recent interest rate rises by the US Federal Reserve and European Central Bank is evidence of the continuation of monetary tightening in the financial markets worldwide.
“The immediate signs are that demand for housing will remain robust over the next few months, although there has been a lull in activity during the World Cup period. The view is, however, that confidence and activity are closely associated with interest rate movements and expectations.”
Major shock
Ray Boulger, senior technical manager at John Charcol, argued a Base Rate change during July would have come as a surprise to the market. He said: “Any change in Base Rate would have been a major shock. The UK housing market is steady, although the modestly rising national figures mask some sharp regional fluctuations. The MPC will have factored in the probability of the year-on-year house price indices falling in the Autumn as the strong growth seen in the last four months of 2005 falls out of the year-on-year figures.”
Boulger added the quarterly inflation report would help indicate future Base Rate movement, with the overseas markets currently dominating Base Rate discussions. “Overseas interest rates have a significant impact on the UK economy as rising rates elsewhere weaken the relative countries economies, thus reducing demand for our exports and also increasing competition from imports as overseas competitors try to make up for reduced demand in their home markets,” he explained, “Although predictions from the money markets continue to point to an increase in Base Rate before the end of the year, the above factors suggest this is not a forgone conclusion but next month’s quarterly inflation report will be the key influence on the BoE’s interest rate policy for the following three months.”
Not unexpected
Barry Naisbitt, Abbey’s chief economist admitted the MPC’s decision was not unexpected. He said: “The BoE held rates at 4.50 per cent, marking the 11th month in which rates have been left unchanged. While financial markets are worrying about whether the US Federal Reserve is going to raise rates for an 18th successive meeting, the MPC continued to hold a steadier course. With economic news continuing to be mixed, it was no surprise that a committee of members who all voted to hold rates last month, did so again.
“The interest for commentators and financial markets will be in whether any of the MPC members voted to raise rates, and so changing their view from June.”
With the industry seemingly gearing itself up for a future interest rate rise, research by Lloyds TSB revealed the majority of consumers also expect a rise in the BoE Base Rate.
The Lloyds Consumer Barometer revealed 65 per cent of consumers expected rates to rise, rather than fall over the next 12 months, with only 5 per cent expecting a cut. With this in mind Louise Cuming, head of mortgages at www.moneysupermarket.com, said tracker products would become more appealing. She explained: “People should be asking themselves whether they are already at the top level of affordability when it comes to their monthly outgoings. If so, and if even a small rise in Base Rates would stretch this, then they would be wise to opt for a fixed rate. If they have some leeway available then they would be better off with a tracker because, ultimately, all the pointers indicate that rates are unlikely to rise significantly in the next two years.”
Hard to predict
With market rises in product interest rates and continued swap rate movement, the future of the market cannot be accurately predicted. Indeed outside influences, such as overseas market conditions and economic and political conditions all help shape the British market and the MPC decision. While a change over the next month or so is unlikely, a rise by the end of the year is to be expected and widely anticipated both in and out of the industry.
