Interest rates to remain static until May suggests analyst

03 March 2004
Danny Gabay from Fathom Financial Consulting, has argued that the Bank of England's Monetary Policy Committee will keep interest rates static until May when they will impose a 50 basis point rise in a bid to slow down the growth of the housing market.

The MPC is currently meeting to decide on its plan, but with house prices said to have risen by 3% last month, the soft approach of slowly increasing interest rates does not seem to be working.

Speaking on BBC News 24's 'Business Today,' Mr. Gabay said: "The interest rates are clearly not high enough yet. There is still going to be some way for them to go."

"The question is how quickly they go up and how aggressively the Bank of England feels it needs to put them up. It does not want to scare the horses too much, but it does want to slow the consumer down to the point where it is achievable."

Mr. Gabay continued: "The first rate hike was a modest 25 basis point hike. The second was just a 25 basis point hike. They have tried to use soothing language, they tried to imply that it is not what they wanted to do, but they have to."

"Sooner or later they are going to have to take control of the situation. As things stand it does not look like it is working."

He added: "To date nobody has ever managed to deflate a housing bubble without bursting it. I think we have a better chance at the MPC than we have ever had before. They are much better able to do that."

"The problem is that when house prices are always being forecast to crash, consumers start to get nervous and you get surveys such as this week's which show a 3% gain in house prices, and you average worker feels they are getting richer which means they are just going to buy more."

Mr. Gabay argued: "On eof the unique problems we have in the UK is that we tend to float a lot more than other countries."

"Although a lot more people were fixing last year than in the year before, it is still relatively low and we are still looking at something like 60-65% of all new mortgages at floating rates, levels, which were close to 50 year lows."

He maintained: "If house prices were to fall precipitously, then that would have serious consequences for the UK economy through consumer spending slow down. I think the strategy the Bank is deploying now is the right one."

"Its slowly trying to deflate the bubble, but it may have to act slightly more aggressively moving by half of one per cent in May rather than sooner."

Mr. Gabay concluded that he hoped the Bank of England would 'be able to bring the consumer down to earth without a bump.'