Wednesday sees the release of the minutes of the June meeting of the Bank of England's Monetary Policy Committee (MPC). At the June meeting, the MPC kept monetary policy on hold with interest rates staying down at the record low level of 0.50% and the committee opting not to add to the £200 billion that the Bank of England has already spent on its Quantitative Easing program. All nine MPC members voted for unchanged interest rates and Quantitative Easing in May, and we expected a unanimous vote again at the June meeting (when there were only eight MPC members as Kate Barker has left and not yet been replaced).
It is very possible that the minutes will indicate increased concern within the MPC over the near-term inflation outlook and the possibility that it will not fall back as quickly or as far as forecasted in the May Bank of England Quarterly Inflation Report. There is certainly some difference of opinion among MPC members over how much spare capacity there is in the economy and how much this will hold down inflation over the longer term.
At the same time, however, there are likely to be serious concerns among MPC members that significant downside risks to still-fragile economic growth are coming from the looming major fiscal tightening and the heightened problems in the Eurozone.
Our view remains that the Bank of England is likely to keep interest rates down at 0.50% into 2011 as recovery remains bumpy and gradual. We acknowledge, however, that there is a very real chance of at least a token interest rate hike before the end of the year if inflation provides further upside surprises over the coming months. We believe that whenever interest rates do rise, the increases are likely to be gradual and limited because of the need to offset the extended, substantial tightening of fiscal policy that the economy must endure. Meanwhile, we expect the Bank of England to keep the stock of Quantitative Easing unchanged at £200 billion for the rest of 2010 and at least the first half of 2011, before starting to gradually reverse the process.
Mortgage Approvals in May and House Prices in June
The British Bankers' Association (BBA) is expected to report on Wednesday that mortgage approvals for house purchases rose modestly to 37,000 in May from 35,729 in April and a 10-month low of 33,481 in February. This would still be down appreciably from the 27-month high of 45,822 in December and well-below the average monthly level of 59,692 seen since 1997. In addition to other dampening factors outlined below, mortgage activity may have been held back in May by the heightened political uncertainty surrounding the 6 May general election and the subsequent formation of a coalition government.
Meanwhile, the Nationwide lender may release its house price index for June during the week. We expect this to show that house prices rose 0.4% month-on-month in June, which would be down from increases of 0.5% in May and 1.1% in April. This would push the year-on-year increase in house prices down to 9.2% in June from 9.8% in May and the recent peak of 10.5% in April. Latest house price data have been somewhat mixed with the Halifax reporting that house prices fell 0.5% month-on-month in May and 0.1% in April, in contrast to the Nationwide's reported rises of 0.5% and 1.1% respectively.
We suspect that house prices will struggle to make significant gains over the coming months. Although it may have picked up modestly from its early-2010 lows, housing market activity is limited. The economic fundamentals—high unemployment, still-falling full-time employment, low earnings growth, and looming tighter fiscal policy—are still far from robust for the housing market, credit conditions remain pretty tight, and house price/earnings ratios have moved back up from their 2009 lows and are above long-term norms. There are also growing concerns that the Bank of England will have to raise interest rates before the end of the year due to higher-than-expected inflation. Furthermore, if household confidence suffers from widespread significant doubts about the stability and longevity of the Conservative-Liberal Democrat coalition governments, it could negatively affect the housing market.
Some support for house activity and prices, however, will come from the stamp duty holiday for the next two years for first-time buyers on all properties costing up to £250,000.
On balance, we believe that house prices are likely to be erratic over the coming months and at best will make very modest gains over the rest of the year. We would not be surprised if they were flat overall through the rest of 2010.
CBI Distributive Trades Survey for June
The Confederation of British Industry (CBI) distributive trades survey for June, released on Wednesday, is forecasted to show that the balance of retailers who reported that saleswere up year-on-year recovered to +8%, after plunging to a 14-month low of -18% in May from +13% in April. Sales are expected to have been lifted in June by the beneficial impact of the World Cup. Specifically, the World Cup tends to increase demand for televisions, a wide range of World Cup related merchandise such as replica shirts, magazines and flags, snacking food, and alcohol and other drinks. It also encourages sales of take-away and home-delivery food.
It is hard to be optimistic about the prospects for consumer spending in the longer term. Consumer confidence has been heading downwards recently, and households face serious headwinds, notably high unemployment and still-falling full-time employment, muted earnings growth, elevated debt levels, high fuel prices, and January's Value-Added Tax (VAT) hike from 15.0% back up to 17.5%.
In addition, the looming fiscal squeeze will hit public sector jobs and consumers' pockets. It is highly possible that VAT will be raised to 20%, possibly even in the near term following Tuesday's emergency budget. Consumers' desire to improve their personal finances is likely to remain because of still-significant uncertainties about the economic outlook and jobs. There is some pressure on the Bank of England to raise interest rates before the end of the year because of heightened inflation concerns; however, we believe that they will not raise rates for many more months given the relatively gradual recovery, and the serious uncertainties over the outlook from the Eurozone crisis and the looming major fiscal squeeze.
23 June - Bank of England Monetary Policy Committee interest rate vote split, June (Hike-Unchanged-Cut): 0-8-0
23 June - Bank of England Monetary Policy Committee Quantitative Easing vote split, June (More-Unchanged-Reduced): 0-8-0
23 June - BBA Loans for House Purchases, May: (000s): 37.0
23 June - CBI Distributive Trades Reported Volume of Sales, June: +8%
During Week - Nationwide House Prices, June (Month-on-Month): +0.4%
During Week - Nationwide House Prices, June (Year-on-Year): +9.2%