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Published: 20 November 2013 | Author: Bob Pannell

  • We do not expect the Bank to move quickly to raise interest rates, once the UK passes the 7% unemployment threshold
  • Housing activity is set to strengthen further in the short-term, and to contribute materially to overall economic growth


The economic news has continued to be overwhelmingly positive in recent weeks. 

GDP figures confirm the strongest spell of economic growth for the UK in more than three years – the ONS pencilled in growth of 0.8% in the third quarter, putting the UK on track to grow by nearly 1½% for the year as a whole.

In the jobs market, the number employed in the third quarter was 378,000 more than a year earlier, with the total number in employment edging ever closer to the 30 million mark. Meanwhile, the headline unemployment rate – referenced by the Bank of England in its forward guidance policy – has dropped to 7.6% of the economically active population.

Inflation, as measured by the headline CPI, fell back unexpectedly sharply to 2.2%, from 2.7% in September and its lowest outturn for just over a year.

In its latest Inflation Report, the Bank of England attributes the strong turn-round in the economy to better credit conditions and less uncertainty supporting domestic demand.

One of the consequences of this is that the Bank has brought forward the time when it sees UK unemployment rate falling to its 7% threshold. Whereas, back in August, the Monetary Policy Committee (MPC) did not see the threshold being reached until 2016, it now thinks this may happen no later than the second half of 2015.

Chart 1: Cumulative probability of unemployment reaching 7% threshold

MC Nov 2013 un

Source: Inflation Report, November 2013

Assuming unchanged interest rates, the MPC attaches an evens chance to the 7% threshold rate being reached in the final quarter of 2014.

The key “take-away” point for most media commentators is that early interest rate rises may be on the cards.

We do not share this view, and we are not sure that the MPC does either. Indeed, MPC members have been at pains to labour the point that 7% is a threshold, rather than a trigger.

Speaking in Cardiff a few weeks ago, the governor Mark Carney summed up the Bank’s mindset, saying that “… we’re not going to look to tighten monetary policy until we see real traction and momentum in this recovery that has been sustained for some time”.

The starting point for the MPC appears to be that the UK economy is still operating below its previous peak level of activity, that economic recovery is at an early stage, and that the recovery risks being subdued by historical standards, because of the legacy of the adjustment and repair left by the financial crisis.

In the Inflation Report, the MPC is explicit in stating that it does not share the market’s view that the most likely path for bank rate is one of increases from the third quarter of 2015 onwards.

Rather, the committee seems relatively sanguine that unchanged interest rates would imply more rapid short-term economic growth and falls in unemployment, and inflationary pressures that are only moderately above target by the end of the forecast period.

Housing market

It is clear from the Inflation Report that the Bank sees the housing market as providing a vital engine of economic growth.

This mostly comes through housing investment, and especially new build activity. The Bank sees stronger housing activity contributing about 1 percentage point to annual GDP growth over the next year or so.

We share the Bank’s assessment that (underlying) housing activity is likely to strengthen further in the near term.

Our latest CML figures confirm that loans for house purchase in Q3 were the highest since 2007.

Partly reflecting government housing initiatives, the pick-up in first-time buyers has been particularly strong, with the 12-month total recently climbing above 250,000 for the first time in five years.

Our forward estimate is for gross mortgage lending of £17.6 billion in October, which would also be the strongest performance in five years. While there is a general revival in mortgage demand, the recent buoyancy of house purchase approvals – nearly 67,000 in September, according to the Bank of England – demonstrates that the ongoing recovery of the housing market is a key part of the mix.

The announcement of the government’s Help to Buy mortgage guarantee scheme may have boosted market sentiment, but its launch is too recent to have had much of a direct effect. Few borrowers numbers have completed transactions as yet, although a No 10 press statement highlights strong initial interest.

The launch of Help to Buy mortgage guarantee scheme comes at a time when we are already seeing a modest recovery in higher LTV lending, from a low base.

Chart 2: House purchase lending above 90% LTV

MC Nov 2013 ltv

Source: CML Regulated Mortgage Survey

The Help to Buy mortgage guarantee scheme will further support revival in housing market, by prompting greater lending appetite and capacity to lend at higher LTVs.

The benefit will reflect both the activities of firms participating under the scheme, and also competition from those who choose to remain outside the scheme but who contest this part of the market.

Although our latest figures show an improving trend for arrears and possessions through Q3, the Bank of England is alert to any downside risks for financial stability that a revival in housing demand could pose in the future, and has indicated that it will address these when it publishes its FSR on 28 November.