The Bank of England continues to follow the global trend to lower interest rates. The Monetary Polic...
The Bank of England continues to follow the global trend to lower interest rates. The Monetary Policy Committee is much less vigorous than the US Fed in this and retains a much higher level of rates than the ECB, but the trend is clear.
With the Chancellor holding to a steady budgetary policy, averting a recession will inevitably depend on easier monetary policy. Since oil and other raw material prices have fallen sharply, the MPC can expect inflation to abate and, hence, can keep bringing interest rates a little lower. The latest quarter-point cut takes them to 4.5%, historically low for the UK but still high on an international comparison. It seems likely that interest rates can be cut further over the winter as recession spreads from manufacturing to the airlines, tourism and the economy generally.
Despite falling output in many sectors, unemployment continues to fall in the UK. Furthermore, with wage earnings growing by 4%-plus over the past year while prices have risen only 2%-plus, living standards have risen for the great majority. This may be about to end as staff are laid off and bonuses shrink, notably in the City. Looking forward, UK policy makers will hope that lower interest rates will lift activity enough to offset the depressing effects already in train.
However, even if successful overall, this policy will not provide sector-by-sector stability. Consumers in general are likely to benefit, and the heavily borrowed will benefit the most. That suggests that the housing market can be expected to continue to enjoy both higher prices and good volumes of business. This is the more likely as housing remains very affordable in the UK by historical standards, despite several years of quite rapid rises in prices.
After the property crash a decade ago, prices remained depressed into the mid-1990s despite recovering economic activity and lower interest rates after sterling left the ERM. By then, house prices stood at little over a half their average relationship with wage earnings and mortgage rates. As such, they were more affordable to working families buying property on a mortgage than for at least a generation.
Furthermore, with more wives working, more people getting financial help from their parents and more people receiving non-wage income from savings, affordability was probably even greater than shown by this measure. With earnings per employee rising by around 5% a year while the number of employees grows and interest rates fall, affordability has been eroded only slowly. House prices still stand at a level that is more affordable than at any time in the 20 years before the 1990 crash in the market.
The growth of wage earnings is likely to slow, with London's position under particular pressure as the City's fortunes take a knock. However, a small rise in earnings is likely even while the number employed may fall over the year ahead.
With mortgage costs falling as base rates are reduced, the housing market seems set to provide an important source of strength to the economy to offset the weakness emerging in other sectors.
Lower interest rates globally.
Inflation is likely to abate.
Mortgage costs are falling.
Growth if wage earnings likely to slow.
Unemployment to increase.
UK rates high relative to rest of world.
Nigel Morgan is an economic strategist at Old Mutual Asset Management
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