Colin Snowdon gives his view on the direction of interest rates in 2005 and believes that what the mortgage market needs now is a period of stability
The Monetary Policy Committee’s (MPC) recent decision to hold the Base Rate at 4.75 per cent for the fifth month in a row took no-one by surprise. It was widely predicted but opinions do differ about the outlook for interest rates during the year ahead.
Factory output figures from the Office for National Statistics showed an unexpected fall of 0.1 per cent in November, which went against economists expectation of a 0.3 per cent rise. Inevitably, this has fuelled conjecture that manufacturing industry is slipping back into recession. Retailers also had tales of woe, with sales over the Christmas period falling back 0.4 per cent on a like-for-like basis compared to the same period last year. The poor trading results of high-street names such as Marks & Spencer and Dixon’s have been well publicised.
Placing the blame
The blame for this decline is placed squarely on rising interest rates and falling house prices, which have shaken consumer confidence – precisely the effect the MPC wanted its medicine to have when it was first administered. Forecasts for the housing market remain mixed, with some experts such as the Halifax predicting a 2 per cent decline in house prices this year and others, such as the Council of Mortgage Lenders (CML), being more upbeat with a forecast of a 4 per cent increase. Either way – be it a modest fall or increase – the sentiment appears to be that we are in for a slow first half to the year with the housing market showing signs of recovery during the second half and into 2006.
Next move
So what should the MPC do next? Is there one more rate rise on the way, as was widely predicted last year, or should the MPC consider cutting rates to reverse the slide in consumer spending and give the first-time buyer market a shot in the arm?
The MPC has to consider a number of factors and keeping inflation under control is its primary consideration. Based on current evidence, there is no reason why the MPC should look to push rates any higher for some time. Many analysts believe there is a growing case for a rate cut but I suspect the MPC will not do so in a hurry without seeing significant further evidence to suggest such a move is required. The next rate move could be downwards but it may not happen until the beginning of next year.
Good or bad?
Should this be interpreted as good news or bad news for the housing market? After the rate rises of 2004 and the rapid slowdown in house prices and lending towards the end of the year, a period of stability has to be good news. I’m sure lenders would accept that the rollercoaster ride of 2004 could not go on for ever and the government also wants no surprises as it prepares for a General Election. We all know that the housing market is not only driven by interest rates but by consumer confidence and a period of stability can do an awful lot to restore confidence and shake-off any early signs of the jitters.
This holds true for the first-time buyer market where confidence has always been a key issue. Falling house prices may well do as much as an interest rate cut to encourage first-timers to put a foot on the first rung of the housing ladder. If it doesn’t, all those potential homeowners will remain tenants for a little longer – good news indeed for the buy-to-let market.
A guessing game
Predicting interest rate movements and their consequential impact on the housing market (or any other market for that matter) is a guessing game that people far better qualified than I have been getting wrong for decades. The problem with crystal ball gazing is that so many unpredictable factors can come into play which drive a coach and horses through the perceived wisdom of the day. 9/11 is the obvious example.
Perhaps some of the most important rates to watch are swap rates, as they directly impact on the mortgage deals on offer from lenders. At the time of writing, swap rates on one year money were down 0.1 per cent at 4.87 per cent, down 0.4 per cent on 3 year money at 4.78 per cent and down 0.2 per cent on 5 year money at 4.81 per cent. Many lenders have been pulling old product ranges and launching new ones – Freedom Lending included. There are, and will continue to be, some excellent new deals on offer fuelled by lenders desire to secure their share of a falling market.
If the interest rate outlook seems a bit boring for the remainder of this year, be glad and hope that unexpected world events don’t conspire to put a spanner in the works.
Colin Snowdon is managing director of Freedom Lending
