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Homeowners cower as MPC gets tough

Homeowners can expect a further hike in mortgage rates in June after it was revealed that the Bank of England’s Monetary Policy Committee (MPC) voted unanimously for a 0.25 percent interest rate rise this month and even contemplated more drastic action.

Minutes from the MPC meeting show that it voted 9-0 for an increase to 4.25 percent, and that committee members talked about the possibility of a half-point rise.

“Arguments for a rise of 50 basis points [0.5 percent] were discussed,” the minutes said. “A [future] 50 basis point rise could therefore be warranted by the Committee’s central projection.”

Future markets, in which traders can bet on the behaviour of stocks and economic variables, are currently pricing interest rates at around 5 percent by the end of the year.

Although this fresh assault on a potentially overheating economy has been seen by many as an attempt to prevent house prices spiralling out of control, the bank insisted that it does not target house prices directly, but considers the indirect impact that they have on inflation.

HAWKS SEIZE CONTROL

The MPC was criticised last month for declining to take action in the face of a booming housing market and huge levels of credit card spending. However, the strong tone of its last meeting suggests that the ‘hawks’ on the committee have now prevailed.

However, the minutes warned that while the economy is now in stronger shape than when it started trying to put the brakes on expenditure, a half-point rise might still damage the fragile manufacturing recovery from the long-term doldrums.

“Although the argument for caution in raising the repo rate, given the uncertainty about the effect of interest rate increases on the economy, was now less persuasive than at the turning point in the repo rate last November, it should still be given some weight when contemplating a larger-than-expected repo rate change,” they said.

SHOCK TO THE SYSTEM?

The Bank of England’s previous softly-softly approach to rates led many analysts to predict the committee would put off another rise, but the minutes’ strident tone raise the very real possibility of another hike in June, and may even opt for its first ever 0.5 percent rise in attempt to jolt the public into reeling in its spending.

“The surprise entailed by a 50 basis point hike might help to moderate the continuing rapid rate of increase in consumer indebtedness by affecting the behaviour of both borrowers and lenders.”

Currency market reflected widespread expectation that interest rates will continue to rise as investors bought heavily in the pound. Sterling rose by more than one percent in just a few hours following the minutes’ publication.