We received the news of the Monetary Policy Committee’s (MPC) decision to maintain the Bank of England’s base interest rate at 0.5% with a degree of relief.
Our concerns were that a cut in interest rates would have continued to add to household debt which the Financial Policy Committee highlighted as a concern in the Financial Stability Report of July 2016. Whilst household debt has fallen, it remains historically high and the aggregate household debt to income ratio was 132% for Q1 2016. The FPC went on to say:
“Highly indebted households are particularly vulnerable to unexpected events that increase the burden of servicing existing debts, such as an increase in interest rates or fall in incomes”. Financial Stability Report, July 2016, p.10
A cut in interest rates could have bolstered consumer spending as well as the business sector by making borrowing cheaper but we were concerned that the uncertainty of BREXIT may well curtail spending anyway, and had the MPC cut rates today, they would have had little ammunition left in their arsenal to provide a boost to the economy in the near future should BREXIT negotiations falter or fail.
Mortgage Rates are at an all-time low but the regulations in place on Mortgage Lending may have provided a soft cap on potential house price increases anyway even with a cut in the base interest rate. According to Council of Mortgage Lenders data (Chart ML4 July 2016 – All house purchases, new mortgages and affordability – UK) the advance rate (Loan to Value ratio) is 78% which is the highest is has been since May 2008. Lenders would not have been seeking to increase this ratio by much until their regulatory and commercial futures are more certain. Only an increase in this ratio would allow, regardless of interest rates, for house prices to continue rising at their current rate unless buyers contribute higher deposits.
As we are heading into uncharted economic territory with the BREXIT negotiations on the horizon and with high household debt, the MPC did well not to add fuel to the housing market today.