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| WEDNESDAY 29TH JUNE 2005 |
 SLOWDOWN
BRINGS UK RATE CUT NEARER
The recent trend of slowing economic growth will bring the
expected interest rate cuts closer according to the Royal Institution
of Chartered Surveyors.
In their June economic brief, RICS said the slowing trend
continued in June. It appears that the interest rate rises
that ended in August of last year and a rapid decline in
house price inflation, continue to weigh upon the UK consumer,
said the surveyors. Weak retail sales, falling manufacturing
output and a stagnating housing market all contributed to
this view.
The housing market appears to be stagnating. Mortgage approvals
recovered slightly in April but the Halifax reported that
prices fell by 0.6% in May. The annual rate of increase in
house prices dropped from 19.7% last September to just 3.2%
in May.
The double whammy of higher interest payments and the removal
of the stimulus provided by rising house prices (mortgage
equity withdrawal fell 59% in the year to Q4 2004 to £6.9
bn), has reduced the available resources for households and
may help to account for subdued consumer spending this year.
While one would expect the impact of these forces to continue
to restrain consumer spending for a few months yet, the strength
of the labour market is providing support to prevent the
slowdown worsening.
But, says RICS, the government’s hands are tied. Almost
every independent commentator now expects significant tax
rises in Labour’s third term, probably starting with
the first budget next March. Hence, the government would
be unable to provide any additional stimulus to the economy
should it weaken further. In fact, they will be withdrawing
stimulus by raising taxes to close the budget deficit, putting
an extra strain on struggling debt-laden consumers.
The reaction of the economy to the last tightening cycle
suggests that consumers and the housing market are very sensitive
to monetary policy, probably due to high debt levels and
relatively high house prices.
With short term interest rates at 4.75% the BoE has scope
to relieve the financial burden on consumers, and promote
business investment, by cutting interest rates. In this regard,
the UK is better placed than most advanced economies as interest
rates are 2% in the Euro area, 3% in the US and 0% in Japan.
However, say RICS, the BoE is mandated to target inflation,
which could tie the Bank’s hands. Consumer price inflation
has remained at 1.9% for three months in a row to May, and
there are risks on the up and down side. Mervin King, governor
of the BoE has recently highlighted rapid money supply growth
and an end of deflation in the price of imports as major
upside risks to inflation in the coming months. In the first
quarter of this year the UK money supply rose at an annualised
rate of nearly 13%, more than twice as fast as in the US
and euro area.
Two members of the BoE’s monetary policy committee
thought the risks of greater domestic economic weakness strong
enough to vote for an interest rate cut in June – signalling
the BoE is ready to ease monetary policy in the coming months.
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