The drop in the bank base rate by 25 percentage points to 0.25% came as no surprise, as it had been ‘telegraphed’ last month by Mr Carney when the Monetary Policy Committee last met, and the press have been saying for over a week that the reduction was a ‘racing certainty’ (and I’m sure their sources are reliable). What did come as a surprise was the amount of Quantitative Easing (QE) that’s been added into the mix, as well as the pressure being applied to banks to ensure the Funding for Lending (as it was called back in 2009) actually reaches the public. Is this all not a little premature?
There is very little solid data about the Brexit effect. We know the pound took a nose dive against the dollar and the euro (which was not unexpected) but the pundits were forecasting a plunge in the stock market, and that never materialised. In fact the markets are strengthening, which is somewhat flying in the face of what the ‘experts’ were forecasting. Confidence polls are saying businesses are uneasy and that they are going to invest less in the UK, yet employment stats are better than ever, house builders are saying the market has not been affected by Brexit and the RICS and the property portals (Rightmove, Zoopla, etc) are saying house prices are continuing to rise, albeit at a slower rate but we are in summer and the market traditionally eases up when the schools break up and everyone goes on holiday. And let’s face it, the polls have got it wrong more times than not recently – as far as I know all the polls said we were to stay in the EU for example. They got that one wrong – big time!
I can’t see the 0.25% cut in the bank base rate having much effect on house buyers. At 0.5% for 7 years the rate was ultra-low and there have been some really good mortgage deals around for the last two or three years. We may be lucky and see some even better deals offered, but my guess, in the residential market, lenders will just see the 0.25% a means to improve their profits.
Where the 0.25% cut may prove beneficial is on the commercial front, and in the Buy-to-Let market, where £m deals will become significantly cheaper with even a small drop in the interest rate being charged. I can also see banks being slightly more ‘flexible’ with their lending criteria if Government want/need them to lend more. Government appears to be setting targets for the banks to lend, and if those targets are not met the cost of money to the bank will rise as a penalty. Is this not similar to the targets RBS set its managers in from the start of the millennium that led to indiscriminate lending and the collapse in the banking system in 2007? When the recession hit the Bank of England denied knowing what the likes of RBS had been doing. Now the BoE are instigating a ‘panic to lend’ environment.
I am yet to be convinced we’re naturally heading for a recession just because the majority of the U.K. voted to come out of the EU. At the moment, we have not executed Article 50, therefore what’s changed? We are still doing business with businesses in the EU. Why wouldn’t we if we have goods they want and they have goods we want? No one’s changed the goal posts. No one has changed the tariffs. The playing field is just as level as it was the day for the vote on the 24th June.
The only thing to have changed is scaremongering, rumour and innuendo – all of which undermine confidence. If a recession occurs before we invoke Article 50 the press, in my opinion, will have caused it and Mr Carney and the BoE will have not only been sucked in by the rhetoric but will now be compounding it with the implicit message a 0.25% reduction in interest rates carries with it.
Michael J Moore FNAEA, MARLA – Moores Senior Partner