Will MPC caution cause housing slump

Since it became clear over the latter weeks and months of the summer that the UK housing boom was slowing down, speculation over interest rate cuts has emerged. What had begun as a question of when rates would rise to six per cent has become first a gradual realisation that the 5.75 per cent rate was likely to stay put for some time, followed by talk of cuts. The responsibility of the Bank of England s monetary policy committee (MPC) is of course the maintenance of consumer prices index (CPI) inflation within a percentage point of the two per cent target set out by the government. House prices, which are not part of the CPI, are no responsibility of theirs. It was natural enough that http://www.assetz.co.uk/">UK mortgage rates should rise after the CPI rate burst its banks by reaching 3.1 per cent in March, obliging Bank of England governor Mervyn King to write an open letter to the chancellor explaining what the MPC was going to do about it. But CPI has since plummeted, falling below two per cent in each of the last three months. Thus the case for a rate cut has emerged. The MPC has held back, unanimously in August and September and with just one dissenting voice this month, from making any change, explaining in its minutes that the situation in the economy is uncertain and the effects of the credit crunch need to be observed. Such an approach was described as "wait-and-see", but this month s MPC committee minutes suggested the November inflation report might provide the clear guidance they were looking for. Howard Archer, chief economist at Global Insight, told the Times: "The October MPC minutes indicate that a November interest rate cut is a genuine possibility. The minutes reveal that the MPC discussed the case for a rate cut in October, with David Blanchflower favouring such a move." But a cut which could boost the UK housing market http://www.assetz.co.uk/">property mortgage just when it seems to be in decline may be a bit less likely now. MPC committee member Kate Barker, a housing expert, told a gathering of businessmen in London yesterday: "Not all of the changes since early August imply downward pressure on inflation. Upward pressures from commodity markets, in particular the oil market, remain a concern." Those words may come as a major blow for those hoping to see the housing market boosted by a cut, plus of course those struggling with mortgage payments. Ms Barker herself said that she didn t expect there to be a "significant" downfall in the housing market, since there was no expectation of overall economic maelstrom or higher unemployment anytime soon. Recent predictions of when the MPC will cut rates have tended to suggest next year is the best bet. The most recent example came from Barclays Capital, which this week tipped rates to next be cut in February 2008, followed by a second 0.25 per cent cut in May, Bloomberg reported. If such predictions are true, the housing market may have to ride out a lengthy period before the respite of a rate cut arrives. As it happens, the November inflation report is not out until the 14th of the month, six days after the next MPC rate decision is due. Thus it may be that the MPC holds back in November and instead moves in December, should a favourable report produce widespread expectations of a cut. It may be that a reduction next month is off the cards, but that still leaves one more chance for a reduction this year.



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