Economists divided over interest rates
The team of economists that sets interest rates suffered a three-way split over whether rates should increase, decrease or remain at 5% in July, the minutes from its vote reveal.
Every month, the nine members of the Bank of England’s Monetary Policy Committee (MPC) meet to discuss the economic outlook and vote on interest rates. In recent months opinion among non-MPC economists has varied over whether rising inflation means interest rates should increase, or the economic downturn means rates should fall.
The debate is just as heated within the ranks of the MPC, it appears, with seven members of the committee voting for a rate freeze in July, one voting for a 0.25% increase and one voting for a 0.25% cut. This is the first time a member has voted for an increase in 12 months.
The minutes reveal that July’s decision was “a difficult one” for all members of the MPC. The majority took the view that, in order to bring inflation back down to its 2% target, interest rates should remain static until at least August. However, Professor Tim Besley argued that interest rates must be increased in order to calm inflation sufficiently, while David Blanchflower called for rates to be cut.
What this means for interest rates remains to be seen. The next quarterly inflation report is due out on 13 August, but the MPC will be allowed access to this prior to its next meeting on 7 August. The report's outlook for inflation is likely to have a big impact on where interest rates head next.
In the minutes of the MPC's July meeting, it is noted that an interest rate rise in that month would be unexpected and might spook the markets. However, experts tend to anticipate rate changes in months when the inflation report is due out – such as August.
Peter Newland, an economist at Lehman Brothers, says: "Given the MPC’s ongoing inflation concerns we cannot rule out an August rate hike... However, we judge that continued bad news on economic activity and signs of easing in inflation pressures (such as the recent decline in the oil price and cut in petrol prices) will be sufficient for the majority of members to keep rates on hold in August."
Ben Read, senior economist at the Centre for Economics and Business Research, says division within the MPC is likely to become more entrenched in the coming months as inflation rises and the economy slows. He adds that, with inflation inevitably worsening to as high as 4.5% within the next two months, more members will start voting for interest rate rises.
But Read says: “The medium-term prospects are that inflation will start to come back towards target early next year. We therefore expect rates to remain on hold for the rest of this year, although there will be increased pressure from both sides of the debate as inflation surges and the economy stagnates."
Meanwhile, there has been more bad news from banks, with another month of falling mortgage lending. The latest British Bankers’ Association (BBA) figures from the high street show that, in June, lending was 23% lower than in the same month last year.
The June figures show that remortgaging remained stronger than new purchase loans during the month, with the latter accounting for just 19% of all approved mortgages.
The fall-out of the mortgage market means more people are having to rent rather than buy. As a result, demand for rental accommodation has burgeoned, and is up 38% since last year, according to estate agent Your Move.
Managing director David Newnes says the credit crunch has buried any chances most first-time buyers might have had of getting on the property ladder.
“There has been a stellar rise in the number of people looking to rent since the credit crunch began to kick in,” he adds. “The criteria banks and building societies use for deciding how much you can borrow have got a lot tougher. People who would have fallen into the first time buyer bracket a year ago are now renting.”
A lot of attention has been paid to the impact of the credit crunch on first-time buyers and those with limited affordability. But specialist wealth management firm, The Route City wealth club, says that mortgage lenders are also turning their backs on high net worth – or triple A - borrowers.
Richard Roberts, property consultant at The Route City, explains: “High street lenders have historically fallen over themselves to attract this kind of borrower, but are now targeting the more competitive products at lower borrowing levels to spread risk.
“This spread of lending means that triple A rated clients are excluded simply due to the larger amounts they want to borrow.”
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.