Interest rates will fall to 4.25% before the end of the year according to Halifax.
The lender says it expects the recent signs of a slowdown in consumer spending growth to be confirmed in the next few months leaving the Bank of England with little choice but to cut the base rate.
And further pressure on the Bank of England to cut interest rates when it meets next week has come in the form of the latest manufacturing report from the Confederation of British industry (CBI) published yesterday.
The CBI report reveals a further decline in manufacturing showing domestic demand weakened in the second quarter of 2005 leading business sentiment to continue to fall despite an unexpected pick up in export orders.
It also says firms have scaled back their expectations for orders for the next three months and that expectations are now at their lowest level since July 2003.
Ian McCafferty, chief economic adviser at the CBI, says: “Whilst demand from abroad helped manufacturing activity to hold up over the past three months developments here in the UK have kept the sector under significant pressure. The decline in domestic orders and associated deterioration in pricing power and profitability is clearing affecting business confidence. These results reinforce the case for a cut in interest rates.”
Meanwhile house prices are still predicted to fall by 2% in 2005, says Halifax, in its latest economic forecast for the housing and savings markets.
The lender says house prices over the first half of the year have developed in line with predictions made in December 2004 with no change in prices overall in the first six months of this year. Annual house price inflation has fallen from 15.1% at the end of 2004 to just 3.7% in June, the lowest level since March 2001.
But Halifax maintains affordability levels are good with mortgage repayments accounting for 20% of gross income of the average new buyer, well below their peak of 34% in 1990 and only slightly above the average of 19% for the past 20 years. The lender also believes the decline in the number of first time buyers may have “bottomed out”. There were, in total, 361,000 first time buyers in the UK last year, it says. But the number of first time buyers this year is almost a third (29%) below the figure for the first six months to June 2004. Halifax claims this fall has, however, been slightly smaller than the overall decline in market activity resulting in the number of fist time buyers, as a proportion of the overall marketing, increasing from 29% in the first six months of 2004 to 30% this year.
The number of transactions in the housing market is also expected to be 20% lower than in 2004 with the number of transactions expected to fall from 1.79 million last year to 1.4 million in 2005, the decline roughly reflecting the downturn in transactions taking place in the early half of this year.
Martin Ellis, chief economist at Halifax, says: "The UK housing market is on course for a gentle slowdown. We continue to expect a 2% fall in house prices this year nationally. This slight decline should be set against nine consecutive years of rising prices during which the average home in the UK increased in value from £61,564 to £162,850."
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