|
|
|
11/06/07 -
Bank of England Holds Interest rates |
The Bank of England
has held UK interest rates at 5.5% following its latest meeting, but
analysts say a rate rise later this year remains likely….
The decision to freeze rates had been expected, to give the Bank time to
assess the impact of recent rate rises.
UK rates have now been increased four times since August last year in an
attempt to rein in inflation.
But with price growth still strong, many analysts expect a further rise to
5.75% before the end of the year.
Rate impact
Business groups welcomed the decision by the Bank's Monetary Policy
Committee (MPC) to freeze rates.
"Whilst the door remains open for a further rise if necessary, today was not
the day for tougher action," said EEF chief economist Steve Radley.
CBI chief economic adviser Ian McCafferty applauded the Bank for resisting
"rushing into a rate rise that, though widely expected, may still prove
unnecessary".
"Evidence is starting to emerge that the four rate rises since August are
having an impact," he added.
Earlier this week, the latest survey from the British Retail Consortium
recorded a drop in underlying sales during May, with recent rate rises being
cited as one factor putting off shoppers.
Price pressures
However, although the Bank refrained from raising rates this month, many
analysts think there is a very strong chance of rates hitting 5.75% in the
near future to keep inflation under control.
While consumer price index (CPI) inflation fell from 3.1% to 2.8% in April,
the measure still remains well above the government's target of 2%.
Recent economic releases have suggested business confidence is rising and
have also indicated that companies are looking to raise prices.
In the housing market, while price growth has slowed, the annual rate is
still hovering around the 10% mark.
A poll of analysts by the Reuters news agency earlier this week put the
chances of rates hitting 5.75% this year at 80%, with a 30% chance they rise
to 6%.
Temporary reprieve
"The Bank of England's decision to leave interest rates unchanged may well
prove to be only a temporary reprieve," said Howard Archer, chief UK and
European economist at Global Insight.
"We suspect that another 25 basis point hike to 5.75% could arrive as soon
as July."
James Knightley at ING said:
"Interest rates are going higher and we suspect that they will get to 5.75%
in July, based on the recent data flow and the hawkish tone to Bank of
England comments."
The UK is not the only nation wrestling with the problems of inflation.
On Wednesday, the European Central Bank raised its main interest rate to 4%
and also increased its inflation forecast for the eurozone this year to 2%
from 1.8%.
Distortion ‘chaotic’ for purchasers
Robert Bryant-Pearson, Chief Executive of Allied Surveyors, commented:
“I welcome today’s decision to hold interest rates at 5.5%. This is a
sensible decision at a time when the level of house prices in relation to
earnings makes the housing market dangerously vulnerable.
“The HIPs shambles caused many houses to come onto the market where the
owners were only interested in selling if they could find a house they
wanted to buy: this distortion is chaotic for purchasers as the number of
houses that are truly readily available for sale is as low now as it has
been over the last few years.
“The housing market has slowed considerably and during the remainder of the
year I would expect to see a quieter market with limited supply matched by
muted demand.
“There is wide speculation that rates are close to their peak in the current
cycle, which is just as well: if rates were to increase much more, then
repossessions would rise and we would see a price crash as we did about 16
years ago”.
Inflation ‘easing off’
The rate decision comes as the latest monthly survey from Halifax shows that
house price inflation is easing off…
The mortgage lender says that in May, house prices rose by just 0.3%,
pulling the annual inflation rate down from 10.9% to 10.6%, reports the BBC.
It said this was clear evidence that the property market was now reacting to
the four increases in interest rates since last summer.
The Halifax now puts the average UK house price at £196,893.
May was the second month in a row that the Halifax has recorded a slowdown
in the pace of annual house price inflation, which reached a recent peak of
11.1% in March.
"The recent slowing down in monthly house price inflation, together with
further evidence of moderation in housing market activity, suggest that the
interest rate rises since last summer are having an impact on the market,"
said the Halifax's chief economist Martin Ellis.
Continued slide in enquiries
The mortgage lender pointed to a continued slide in enquires from new
buyers, as reported by estate agents, and the recent drop in new mortgage
approvals recorded by the Bank of England.
The Halifax predicts a further easing of house prices during the year, but
Mr Ellis suggested this would only be moderate.
"Solid economic conditions and high employment support housing demand," he
said.
"The market remains supported by solid economic foundations which, together
with supply shortages, will continue to support prices," he added.
Analysts agree with Halifax's broad assessment that house prices will
continue to lose buoyancy over the coming months as demand is pressurised by
higher interest rates, modest increases in disposable income and high house
prices themselves.
6% interest rates ‘a real possibility’
In addition, Global Insight's chief UK economist Howard Archer said 'the
very real possibility' that interest rates could reach 6.0 pct before the
end of the year is likely to act as 'a significant deterrent' to many
potential house buyers.
Despite these factors, Archer said a general shortage of property means that
pricing power is currently still in favour of the vendor, particularly in
London and the South East, where prices are being fuelled by elevated City
bonuses and strong foreign demand, as well as an acute shortage of supply.
'Nevertheless, significantly more houses have come on to the market in
recent weeks as vendors looked to beat the originally planned introduction
of compulsory Home Information Packs (HIPs) in June,' he added.
'This could well have some dampening impact on house prices in the near term
at least, although it remains to be seen how housing supply will be affected
by the now somewhat confusing situation over HIPs,' said Archer.
|
|
|
|
|
|
|
Home
- Site Map -
Contact us