The monetary policy committee (MPC) of the Bank of England put up interest rates last week by a quarter or a per cent for the third time since August, bringing the base rate to 5.25 per cent. The move, which was not expected by industry pundits, will be seen as an effort to control inflation, which has crept 0.7 per cent above its 2.0 per cent target.
The move was panned by the housing industry, coming as it does at a time when first-time buyers are finding the market unapproachable. Philip Davies, chief executive of Linden Homes, says, ‘The Bank's decision to raise interest rates again is likely to price many remaining first buyers out of the market. This will result in stagnation and prevent existing home owners from moving up the ladder. Consumer confidence will be dented by this latest rise, implying the continuation of an upward trend in interest rates into 2007.’
David Bexon, managing director of SmartNewHomes.com, calls this ‘a dangerous decision at this time’ and says the rise ‘could prove detrimental for the housing market and could sabotage a buoyant start to the year’. Citing the potential for insecurity that may stem from the introduction of HIPs in June, Bexon worries that those who have recently bought and those who were preparing to do so will be adversely affected, with the result that new buyers will be deterred from entering the market.
With financial announcements, the explicit message is sometimes said to hide a more subtle communication, as institutions telegraph intentions and attempt to change behaviour through policies and accompanying statements. With the recent interest rate rise, Assetz finds just such an ‘Easter egg’, with the MPC’s intervention as laden with symbolism as the horse’s head in Jack Woltz’s bed in The Godfather: ‘The MPC has delivered a warning shot to businesses with this surprising rate rise so early in the year,’ says Stuart Law, Managing Director of Assetz. ‘As we enter the main wage bargaining period the Bank is shocking businesses into restraining wage rises by increasing their existing costs and showing willingness to raise rates further, thereby helping curb inflation.’
‘This rise is unlikely to be related to house price growth, as this is caused by the imbalance between supply and demand rather then low borrowing costs.
‘We expect that wage inflation will be kept under control at four per cent or less, while inflation is expected to drop back down to two per cent by the end of the year. This, combined with falling energy prices, confirms that the economy is on an even keel and we are likely to see the Bank holding or lowering rates in the coming months.’
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Unlike November’s rise, this month’s interest rate rise was a surprise to all. Much like the freak weather it has caught all of us unaware and unprepared.’
‘Within 30 minutes of the announcement we were directly called by two customers. The first asking to move quickly on a fixed rate product within the market before rate repricing begins and; the second customer wanting to move immediately off their tracker as they couldn’t afford their £30 hike in monthly mortgage repayments. Customers are seeking certainty in the face of financial adversity.’
‘Moneypilot’s advice to customers is don’t panic, you’re not on your own. If you’re concerned about the impact on your mortgage, and other debts, there is plenty of free independent financial advice out there. Any good mortgage advisor should fully assess your mortgage planning needs and provide you with the financial stability during 2007’s rate uncertainty.’
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Chris Kelly, managing director of MyPlace estate egency in south-west London, comments:
‘Although a rise in interest rates is a big story , the increase is only the usual 1/4 percent. The effect will be increased mortgage payments but not by
much.’
Clydesdale Bank
Tom Vosa, chief economist at Clydesdale Bank, said: ‘The move hadn't been anticipated by the markets. It seems enough members of the Monetary Policy Committee were worried that the strength of consumption going in to Christmas - plus evidence that wage demands are rising at a stronger than anticipated pace - means there are risks that inflation will overshoot the Bank's target of 3 per cent.
‘A pre-emptive rise now could be an attempt to avoid tightening in February being seen as a knee-jerk reaction to any rise in inflation through the three per cent upper limit, which would require Governor King to write to the Chancellor explaining how he intends to get inflation back on target when December data are released next week.
‘With personal incomes being eroded by higher taxation and debt costs, it is possible that ongoing wage demands will mean that further tightening will be needed. That said, after a solid Christmas, retailers can now expect to see much tougher trading conditions.’