6: UK Base Rate Expectation - PropertyInvesting.Net view of consensus
06-13-2004
There has been much commentary about the threat of higher UK base rates on the housing market. To provide some transparency, PropertyInvesting.Net has prepared a consensus expectation view compiled from commentary in mid June on the likely direction of UK base rates. If significant changes occur to the consensus view, we will update the expectation chart below. It shows rates rising to 5.25% by mid early 2005 then dropping back. The cycle of 3.5% (mid 2003) to 5.25% (early 2005) is considered by most experts to be a large increase. Some expect rates to top as high as 5.5% and others as low as 5% - 90% of commentators expect rates to peak in this range some time between end 2004 and mid-end 2005. This is now thought likely to happen fairly swiftly as inflationary pressures build cause by:
- tightening the the labour market
- reduction in manufacturing slack
- rise in oil prices to 33-38$ range feeding through
- house prices still rising strongly leading to robust consumer spending with high levels of consumer debit
The view would could change significantly if a "shock" occurred - examples are oil price increase, security fears, house price crash.
The BoE will undoubtedly been keen to make sure that a house price crash does not occur - due to a crash's general negative effect on the economy. If a swift crash began, the BoE could step in and reduce rates quickly to counter this - if the crash looked likley to cause their CPI inflation forecast on a one-two year time frame to dip well below the target of "at or below 2% CPI". This could happen if bankruptcy and unemployment increased whilst consumer spending decreased. This scenario provides a small amount of protection against drastic property price falls, though it does not mitigate the risk by any means.
It is worth pointing out that the UK rates are "out of synch" with US and Euro rates and far higher - if this continues then the UK Sterling might strengthen further leading to deteriorating trading conditions for manufacturing - something the Bank of England will be keen to avoid. If one believes that Euro and UK interest rates will need to converge one day - to position for entry into the Euro, then UK rates will need to come down significantly in the longer term, and UK Sterling is likely to devalue against the Euro. Most commentators think the chance of proper Euro-convergence is some way off - and might depend on the Referendum planned on Europe. There might be some planned convergence even if we do not join the Euro as economics and trading become closer with Euroland.
