Weak growth could keep rates on hold this year
Published: 5 May 2011 | Author: Bernard Clarke
Today’s decision by the Bank of England’s monetary policy committee to hold base rate at 0.5% reinforces our view that tightening is some way off.
Although inflationary pressures persist, we believe the committee is likely to continue to be swayed by the poor state of household finances and their impact on consumer spending. August now looks the earliest possible date for a rate rise, but weaker short-term prospects for economic growth suggest that the committee may hold off from any tightening for the rest of this year.
Over the past few months, committee members have struggled to balance the risks of stubbornly high inflation and economic fragility. Since publication of the Bank’s Inflation Report in February, pressure for an increase in the rate appeared to be growing, before an unexpected decline in consumer price inflation in March again dampened expectations of a rate rise.
Meanwhile, the pressure on household finances is suppressing demand in the housing market and mortgage lending activity.
Gross mortgage lending totalled £11.4 billion in March, according to Bank of England data reported yesterday. The figure almost exactly mirrored our own initial estimate of £11.3 billion, published last month. Seasonal factors helped produce a 22% increase over February’s lending figure. But the underlying picture shows little variation and remains subdued, with gross lending 1% lower than a year ago.
Net lending, meanwhile, continues to move within a narrow band at low levels.
The unadjusted number of house purchase approvals rose strongly to 57,000 in March, but again this almost entirely reflects seasonal factors. The underlying seasonally adjusted total edged up by almost 1,000 to 48,000.
In the first three months of 2011, demand for house purchase loans fell as household finances came under pressure and consumers remained cautious. However, lenders expect the availability of mortgage credit to improve in the current quarter and this should help underpin house purchase activity, albeit at low levels.
Remortgaging activity showed signs of steadying in March. The unadjusted total of remortgage loans rose to almost 40,000 and was the highest for more than two years. The seasonally adjusted total eased back to 32,000, but this was 14% higher than in March last year.