The decision by the MPC to maintain the BBR at 4.75 per cent did not come as a surprise to many. Following the largely unexpected shift to 4.75 in August, many commentators urged the need for stability, before further rate changes. With many lenders experiencing record or high levels of business throughout the typically quiet month of August, and the UK financial market as a whole undergoing its own period of stability, Stuart Law, managing director of Assetz, admitted the decision to keep the BBR stable was justified. He said: “The Bank of England (BoE) has made absolutely the right decision in maintaining interest rates, as a further rise so quickly would have damaged the economy irreparably.
“The BoE is walking a tight-rope at the moment. Another rise would deliver inflation to the UK by shocking the consumer into demanding higher wages, causing price growth and creating inflation.”
He added that further rises would lead to a drop of activity within the housing market, particularly among first-time buyers. He said: “House price growth is positive but sustainable, and does not currently need curbing. Investors and first-time buyers in particular are already feeling the pinch of the last rate rise and a further jump in rates would have had a disastrous effect on the market.”
‘Wait and see’ approach
Barry Naisbitt, chief economist at Abbey said the decision by the MPC reflected a wait and see approach. He said: “The MPC members will probably want to evaluate the incoming economic news and assess whether the change made last month has had any significant impact on economic activity and inflation expectations. The economic news over the past month has not been sufficiently dramatic to alter the markets’ expectations of a further BBR rise.”
However, despite the MPC decision to leave the Base Rate unchanged, many in the industry believe a further rate change, to 5 per cent, is likely before the end of the year, with November the predicted month of change.
Mehrdad Yousefi, head of intermediary mortgages at Alliance & Leicester, said: “Following last month’s rise in the BBR – which took some commentators by surprise – a further rise in September was not anticipated. The decision to maintain rates this month comes against a backdrop of a generally healthy economy, with stronger than expected retail sales data and consistently robust mortgage lending figures with the BoE forecasting economic growth above trend.
“The economy is still facing inflationary pressures due to higher energy prices and most commentators now predict another increase before the year is out.”
Drew Wotherspoon, head of communications at John Charcol, added: “It’s no surprise to see Base Rate held as the true impact of last month’s increase – the first move in a year – is still to be fully felt. If the strong growth in the housing market reported by leading industry bodies continues for the next month, then this, coupled with the next quarterly inflation report, makes November the most likely time for another quarter point rise in Base Rate.”
Consumer awareness
Peter Gladdy, director of Mortgages Direct suggested rising consumer caution and knowledge had meant that they were waiting longer to decide on the best deal, taking into account Base Rate changes. He said: “It is widely expected that rates will rise further this year. Borrowers are now a lot more cautious since the widely anticipated rise in interest rate eventually came to fruition. They are not prepared to take the chance that the rates will remain low and are therefore securing their mortgage loans at the current levels. The Base Rate rise has not yet had any significant impact on the volume of mortgage loans taken out but, with debt servicing cost at a record high, any further rise could cause a substantial change in homebuyer attitudes and significantly dampen activity in the housing market.”
A statement from the Council of Mortgage Lenders (CML) revealed that activity in the housing market remained upbeat, with little to suggest a radical change. However it revealed that rising utility bill payments would have a slight impact on the market, leading to lower levels of activity. Wotherspoon agreed that rising costs, such as utility and fuel, could impact the market and lead to a change of the Base Rate. He said: “While the housing market is still in good shape, consumers continue to be hit by increases to domestic fuel bills, many of which won’t be implemented until later this year. Retail statistics also show that the Bank’s interest rate rise in August has hit retail shopping. The latest retail figures show a fall of 1.3 per cent on July 2006 which is down 3 per cent year on year. Inflation is also still way above target at 2.4 per cent and a 0.1 per cent fall on last month’s figures shouldn’t be seen as a solid correction in the market.”
Conclusion
It seems almost certain that the MPC will vote to raise the BBR to 5 per cent before the end of the year. However, after this, the financial services sector will be looking at an extended period of consolidation. All of the signs point to a rate change to 5 per cent, but the MPC needs to be absolutely sure that as a result of further changes, the market does not become overly destabilised.
