Housing Rises On Rate-cutters' Radar

Earlier this week many were surprised to hear Bank of England monetary policy committee (MPC) member Tim Besley indicate an apparent shift in his position on interest rate cuts. Known to be a rate-cut opposing hawk, he seemed to soften his stance by telling the Institute for Fiscal Studies that a "balanced" assessment was needed by the MPC when making decisions about whether to cut or hold interest rates. For those hoping to see the property market boosted by mortgage interest rate cuts, this was heartwarming news.

This shift, described to the Times by Global Insight chief economist Howard Archer as "significant", appears to be contagious. When it announced the reduction in the base rate to 5.25 per cent earlier this month, the MPC talked about balancing upside and downside risks to inflation. The same was true in its inflation report last week and, today, in the minutes of the meeting.

It is not quite the case that everyone is singing from the same hymn sheet, but nearly so. The decision itself was almost universally expected, with all 60 economists asked their view by Reuters and 58 of the 61 polled by Bloomberg correctly predicting the February decision. In the event, two of the three Bloomberg dissenters, if not correct in their forecast, were at least right about one member going for a 0.5 per cent cut.

That member, of course, was David Blanchflower, the sole supporter of a reduction in January and keen on a larger cut than everyone else in February. Nonetheless, this still left a unanimous view that the balance that everyone was talking about had tilted towards the need for a cut.

How significant housing is in this may have been hinted at by Mr Besley when he spoke about the need to take into account financial markets as an economic barometer. Speaking last night, deputy governor Rachel Lomax said that the coming surge in inflation was probably inevitable and the MPC couldn't stop it, whereas there was a danger to the housing market that was readily avoidable. Warning that "the mortgage market could become less competitive and more expensive, feeding back into a decline in the housing market," she said the MPC may have to be "unusually flexible" in the months ahead.

Whether the view of Ms Lomax, a dove when it comes to rate policy, will prevail remains to be seen, but the notion that the Bank should look closely at the housing market may help to ensure rates are kept low enough to help reignite demand.

Some evidence may have emerged to indicate this process is already underway. Council of Mortgage Lenders (CML) figures for January, the first month when the effects of the December rate cut could be felt, showed an 11 per cent rise in gross lending from December, up from £23.9 billion to £26.5 billion, just 0.1 billion down on January 2007.

CML director general Michael Coogan gave a guarded response to the news, suggesting volumes could fall again and that remortgaging was more responsible for the rise than new buying. Instead, Mr Coogan focused on the issue of the impact of stamp duty on affordability as he emphasised the CML's desire to see this burden eased in the budget. It remains the case, however, that the stated view of the CML - reiterated in its News and Views digest this week - is that falling interest rates will themselves help improve affordability. Given the sentiments expressed by hawk and dove alike this week and in the last meeting, the prospects of more reductions soon may be strong.
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