It is interesting to compare the responses of the US Federal Reserve and the UK Monetary Policy Committee.
Since the credit crunch became a serious concern, the US have cut interest rates from 4.25% in January to 2.25% in March. From any perspective, this is a pretty decisive change of policy
The UK by contrast has only seen a modest fall in interest rates from 5.75% to 5.25% and the MPC have given alot of emphasis to rising inflation (yesterday saw CPI inflation rise to 2.5%
Why is This and What are the Prospects of Rate Cuts in the UK
- The downturn in the US economy is more serious. US House prices have fallen 10% since their peak. In the UK annual house price inflation is still positive. (though this might change)
- The MPC only have an inflation target. Therefore, with cost push inflation factors pushing up inflation (this includes: food prices, energy prices and rising import prices from Pound depreciation) the Bank is reluctant to cut rates and encourage inflationary expectations. The Fed has a broader remit to also target full employment.
- The Credit Crunch is more severe in the US. Most of the mortgage defaults which started the credit crunch originate in the US. However, it is debatable whether the UK is in a much better position. Many UK banks are exposed to subprime losses. Money markets have been freezing up in the UK as much as in the US.
- Growth in the UK could be slower than the government predict (i.e. optimistically hope for) In this case demand pull inflation will fall and this may enable the Bank to cut rates.
- I think future UK interest rate cuts depend on the future of the housing market. If house prices fall like in the US, the likelyhood of a recession is very high.
- Will the Bank cut rates this year? I think they will, but with producer price inflation at 5.7%, I think they will remain conservative and perhaps only have two 0.25% cuts in the next 9 months. There is a fear the MPC could get it wrong and worry too much about an inflation target.
- In my opinion the Bank of England Monetary Policy Committee need to take a few lessons from Ben Bernake and the Fed’s respone to the potential downturn.
Avoiding recession with inflationary pressures at Economics Essays
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UK facing worse financial crisis in decades
Some types of mortgages are getting harder to come by in the UK with a few lenders leaving the market. Lenders are also much stricter than they were 6 months ago.
3 month LIBOR rates are rising too which means that interbank lending is increasing. Last time I checked they were; UK Base rate 5.25%, UK 3 month LIBOR 5.96% and UK 10 year swap was 4.98%
What does this mean?
There is still cash in available in the system but lenders who would lend at 100% loan to value will now only consider lending at 85% loan to value.
The point about a value of a property or anything else for that matter is that the real value is only determined when someone buys it.
If UK properties do start falling in the price that buyers are willing to pay (or they can’t borrow what they need). Then we could all be in for an interesting ride.
As it stands we are still attracting clients and in greater numbers.
I share the view of the previous commentator, the MPC need to keep abreast of what’ s really going on. Inflation can be measured in so many different ways so lets hope they keep their ear to the ground.