Market awaits MPC interest decision


Market awaits MPC interest decision
Speculation is rife over the potential direction of interest rates in the UK, with the Bank of England's monetary policy committee (MPC) announcing its decision at midday today.

While there have been calls from the property industry for a cut – to reduce the cost of borrowing and spur market actively – inflation has been stubbornly above target in recent months, tying the hands of the MPC and make a hold in rates the most likely outcome.

"The MPC will almost certainly keep interest rates on hold on Thursday," predicts David Kern, economic adviser to the British Chambers of Commerce.

"But the economy urgently needs an interest rate cut to counter threats of recession. The MPC cannot ignore the dangerous effects of rising insolvencies, falling house prices, and worsening pressures on the banking system."

House prices have fallen by 8.1 per cent over the last year, according to the latest research from Nationwide - the fastest rate ever recorded by the building society's monthly survey.

"With UK inflation expected to increase above 4.5 per cent in the next few months, the MPC may not be able to cut rates immediately," added Mr Kern.

"But as soon as inflation peaks later in the autumn, the MPC must start cutting interest rates without delay."

The Bank has maintained rates at five per cent for the last three months, walking a tightrope between a slowing economy and rising inflation.

Yet, regardless of this the National Association of Estate Agents (NAEA) has led calls for a cut in rates to spur a rapidly softening market.

"A positive housing market is essential for the overall economy," explained Peter Bolton King of the NAEA.

"There remain strong economic factors in the country like high employment but confidence is a huge issue and only a significant move will restore that confidence and convince lenders and public alike - the Bank of England needs to reduce interest rates and take action fast encouraging buyers back into the housing market."

The NAEA is calling for action to halt the dramatic fall in transaction levels, which the Bank of England reports have fallen 70 per cent over the last year.

Given, however, the Bank's primary objective is to control inflation, a consumer price index (CPI) of 3.8 per cent – nearly double the two per cent target – is likely to force the Bank to hold, or at the outside increase, the rate.

In the longer-term however, as inflation falls in line with global commodity prices, some industry insiders are expecting sharp cuts.

"We expect that very weak economic activity to increasingly contain and then dilute underlying inflationary pressures," explained Howard Archer, of analysts Global Insight.

"We expect wage growth to remain muted as companies are under enormous pressure to contain their soaring costs, particularly as they face slowing demand.

"Furthermore, the rise in unemployment is picking up and this is likely to increasingly undermine workers' bargaining power, particularly as companies may well threaten to offset higher wages by cutting their workforces," he added.

Consequently the intelligence group predicts rates will stay at five per cent until the end of 2008, before being cut steadily to 4.25 per cent by mid-2009 and to 3.75 per cent by the fourth quarter of next year.

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