BoE Resisting Pressure To Cut Rates In Jan 2008
The Bank of England is under pressure to cut interest rates for a second time in two months in an attempt to prevent a recession in 2008. The Bank's Monetary Policy Committee came out of a two-day meeting and announced that they will keep the base rate at 5.5%. Stuart Law, chief executive of property investment company Assetz, says that could bring base-rate tracker mortgages down to 5 percent. Other analysts expect the rate to drop as low as 4.5 percent this year.
Economists are pushing the bank to lower rates more in an effort to increase consumer and retail spending. This should stabilize the economy for a while. Interest rates would encourage people to borrow larger mortgages and invest in larger homes.
The focus is on the housing market. It does not drive the city analysts, but it does have a major impact on consumer confidence and the amount people are willing to spend at the retail level.
Historically, consumer confidence had a direct effect on the interest rates. Immediately after September 11, the Bank of England cut rates to 3.5 percent, which translated into a 26 percent increase in house prices.
The Bank of England is reluctant to drop rates for several reasons. The number of unemployed people who are claiming benefits is at a 32-year low. The annual growth in wages is at a healthy 4 percent.
Another reason the Bank is not anxious is because the demand for homes in the UK outstrips the demand by 200,000 - per year. The housing industry expects this deficit to build for at least ten years.
Martin Ellis, chief economist at Halifax, said that demand could soar. "The shortfall could be even higher."
Steve Cox, operations director at Spicerhaart Financial Services, said. "As affordability constraints are eased and demand continues to outstrip supply, the long-term future is set to be bright."
Currently, economists are not rushing to make solid predictions for the coming year, except to indicate the interest rates will come down.
Published on January 15, 2008
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