Which way is the economic tide flowing?…

At a time when there is little consensus on the severity of the storms that approach us – the prevailing view at least, appears to be for a hold in Interest Rates by the UK Monetary Policy Committee (MPC).

The comparison with the US economy, in relation to the housing market, is necessarily limited – as the relation of demand and supply is very different. In the UK, we still have demand way ahead of supply, so any house price fall is likely to be more muted and subject to corrective limitations. Prices are unlikely to fall substantially – even if the rate of increase has itself dropped noticeably over the last few months.

However – of course, it is not only for the sake of house prices that the experts comprising the MPC will determine Interest Rates; it is for the general feeling of wealthiness – and the prevailing inclination to retail consumption – that house prices are the best indicator. If a person’s main asset is falling, then they are less likely to consume – further undermining impetus for growth.

Moreover – the link between the Pound and other currencies is also a key determinant: if Interest Rates are lowered, then internationally the Pound seems less of a good option than before – lowering its exchange rate. This in turn has inflationary effects, as consumption from imports become correspondingly more expensive – causing further tightening and concern. As has been noted also – the UK Chancellor (Finance Secretary), Alistair Darling, has very limited room for manoeuvre with Fiscal Policy: UK Government debt is at too high a level to start easing the fiscal reins….we wait in anticipation.

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