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Published: 20 November 2014 | Author: Mohammad Jamei

  • Expectations of the first interest rate rise in the UK have moved to Q4 2015, after the Bank's Inflation Report revealed MPC members see inflation remaining below target for the next few years.
  • While the housing market has cooled in recent months, mortgage lending continues to be underpinned by positive factors.


The economy continues to show strong growth, as Q3 figures were in line with expectations of 0.7% growth quarter-on-quarter.

Positive conditions for short-term growth at home are in contrast to the picture abroad. The European Commission has revised up the UK’s growth forecast for next year, while at the same time nearly halving Germany and France’s growth forecast. 

Overall growth in the eurozone appears weaker with downside geo-political risks, mainly focussed on Ukraine, and wider financial risks looming.

The differing picture across major economies is reflected in the respective action of central banks around the world. The Federal Reserve in the US has ended its asset purchase programme, the European Central Bank has plans to inject €1 trillion to rescue the eurozone economy from stagnation, while the Bank of England has opted to maintain the status quo, keeping official rates at a historic low, and the stock of purchased assets at £375 billion.

Market expectations for base rates rises have eased further, with the first rate increase now anticipated in Q4 2015 as a result of lower inflation forecasts.

The latest jobs figures show that there were 694,000 more people in work than a year ago, with the unemployment rate remaining at 6.0%.

With consumer price inflation subdued at 1.3% in October and regular pay increasing by a similar amount, the period of falling real wages over the last five years could soon be coming to an end as expectations of inflation in the near future remain low.

Chart 1: Average earnings and consumer price inflation annual growth rates

 Market Commentary November 2014 AWE3

Source: ONS


Housing and mortgage markets

As the temporary impact of implementing the mortgage market review fades, it is becoming easier to see a clearer picture than a few months ago. 

Nearly all indicators in the housing market align with our view of a gentle easing in market conditions. 

Most house price indices describe a slowing in annual house price growth and some are showing negative month-on-month growth. Mortgage approvals fell for the third month in a row, suggesting weakening demand. On a more regional level, market surveys show that the London market is moderating. 

While this is our near term view, it is by no means certain that this will become a longer-term period of weakness.

For example, back in August expectations of the first rise in interest rates were in Q4 2014. This would have caused potential borrowers to be more cautious about the effect on their mortgage repayments, as was reported by some lenders. These expectations have just recently been pushed back and we are now expecting the first interest rates rise towards the end of 2015, while expectations of the base rates are 0.6 percentage points lower by Q4 2016 than they were a few months ago.

Chart 2: Market expectations of BoE base rate at Inflation Reports in 2014

 Market Commentary November 2014 interest rates

Source: Bank of England


This has been coupled with increased competition amongst lenders who have cut their mortgage rates. 

Given these factors, as well as the more positive forecasts for growth, pay and unemployment, there is a potential for market activity to gain traction in the new year. 

For the time being, the market is in a steadier state than it was earlier in the year. This fits together with our estimate of gross lending in October of £19.0 billion. This would be 5% up on the month in September when gross lending was £18.1 billion. The annual growth rate of 8% continues a trend over 2014 of slowing from nearly 40% year on year in January.

Chart 3: Gross and net lending figures

 Market Commentary November 2014

Source: Bank of England


Macro-prudential update

Following on from last month’s request by the Financial Policy Committee to be granted powers of Direction on loan-to-value ratios and debt-to-income ratios on both owner-occupied and the buy-to-let sector, the Treasury has begun a consultation on which specific powers the FPC should have. The consultation has purposely left out the buy-to-let sector as the government seeks to gather evidence on whether the sector could carry risks to financial stability. 

The document says that the government will carry out a separate consultation on the FPC’s recommendation regarding the buy-to-let sector in 2015.