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Interest rate rises getting closer

Nia Williams

August 20, 2014

Ian McCafferty and Martin Weale voted against the proposition of interest rates staying at 0.5%, preferring to increase Bank Rate by 25 basis points.

The Monetary Policy Committee minutes from its August meeting state: “Following four consecutive monthly falls, the number of mortgage loan approvals for house purchase had increased by 5,000, to 67,000, in June. The number of applications for mortgages had also picked up a little.

“Together, these data supported intelligence gained from the major UK lenders that the immediate negative effect on lending activity associated with the implementation of the Mortgage Market Review was beginning to wane.

“Most lenders expected that its impact would continue to subside in July. Nevertheless, mortgage approvals had been weaker than expected at the time of the May Inflation Report, when they had been projected to rise to around 85,000 per month by the end of the year.

“The recent indicators suggested that a number around 75,000 per month on average in Q4 now seemed more likely.

“Together, the apparent reduction in demand for, and increase in the supply of, homes in the secondary market would act to ease pressure on house prices. The Committee’s updated assumption for house price inflation was somewhat softer than that made three months ago, with the pace of price appreciation expected to slow to around ½% per month on average by 2015 Q1.”

The minutes showed that for most members there remained insufficient evidence of inflationary pressures to justify an immediate increase in Bank Rate. In the central projection contained in the August Inflation Report, even with the gradual and limited increases in Bank Rate implied by market rates inflation was expected to reach the 2% target only at the end of the three-year forecast period.

There were also arguments regarding the current and prospective impact of Bank rate on the economy. The MPC noted that a premature tightening in monetary policy might leave the economy and highly indebted households vulnerable to shocks.

Jeremy Duncombe, director, Legal & General Mortgage Club, said: “For the first time in years we are seeing some members of the MPC voting to increase interest rates.

“This highlights that the discussion on a rate rise has moved from an ‘if’ to a ‘when’.

“Whilst there is still some debate about exactly when this will happen borrowers need to consider the impact it will have on their finances now.

“With many lenders already pricing in increased rates those who are coming to the end of their mortgage deals should speak to an adviser about the best option for them sooner rather than later.”

And Warwick Business School’s professor of financial economics, John Thanassoulis, added: “This may reflect how the current UK inflation figure is hard to interpret. The economy is recovering as GDP has been growing; house prices have been rising and unemployment has been falling.

“Thus in the near term one would expect inflation to start picking up. This will occur as the labour market tightens so that workers can start to bargain for higher wages.

“This all points to inflation rising and an early initial rate rise. And yet this month’s inflation figure is down. This could suggest that the economic picture is worse than the above analysis suggests.

“However, the ONS highlights other reasons for the month’s figure: the late timing of the summer sales due to good weather mean clothes prices were unusually high in June this year and so the fall to July more pronounced than usual; the strengthening march of Aldi and Lidl, the supermarket discounters, has begun a retail price war lowering prices; the low ebb of the Eurozone has made sterling appreciate so that imported goods appear cheaper when priced in pounds.

“If these reasons are correct then the low inflation figure is likely to be an aberration as the sales and price war effects run their course.

“One would expect UK economic growth to continue in September and wage growth to follow in due course. Which of these competing explanations applies is unclear.”


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