Tuesday, 8 July 2014

Rise in interest rates is inevitable

A rise in interest rates is inevitable at some point but Will Mooney, Carter Jonas partner and head of its commercial agency and professional services in the eastern region, wonders how soon is now?

A year ago in these pages I was anticipating the end of the central banks’ monetary stimulus for their economonies. In the case of the Bank of England, it was, at that point, the £375 million worth of quantitive easing.

‘Removing the punchbowl just when the party is getting good’ is the phrase attributed to the Federal Reserve’s longest serving head who first coined it to describe the withdrawal of stimulus. Now there’s another central bank party pooper in the form of the threat of interest rate rises. Or rather, it’s the talk of the threat interest rate rises which is the spectre at the feast.

The Bank of England has held its base interest rate at 0.5 per cent for more than five years. At such a record low level, the only certain way is up. But when? And by how much? Such uncertainty could be damaging at worst but is unhelpful at best.

Since the late 17th Century, governments and, subsequently, the Bank of England have used the cost of borrowing as a means of responding to the economic pressures of the times. In the early years of Margaret Thatcher’s administration, in 1981, interest rates rose to an all-time high of 17 per cent. But that was a time before the great push towards property-ownership which has set itself in the psyche of the British public in the successive three decades to the point where it is commonly accepted as the touchstone of daily, domestic economic prosperity.

Now the 2014 property-owning democracy is incredibly twitchy about any talk of interst rate rises even if they are just going to be incremental by those ‘baby steps’ mooted by some commentators. There’s also a slice of homeowners who’ve moved in to the housing market since 2008 and whose lives are highly-geared around access to finance and low interest rates. There are plenty of other homeowners for whom a time when base rates were always in double figures is a dim and distant memory - if they remember it at all.

There is a view that interest rates are too blunt an instrument to control the complexities of a modern economy. But, in early June, when the European Central Bank slashed its deposit rate to below zero – minus 1 per cent – so it actually will cost commercial banks to keep their money centrally, it must have left many a lay person marvelling at the sophistication of economists, financiers and policy makers. Far from blunt.

In order to avoid the economic - and party political - collateral damage a big hike in interest rates could mean, we’re beginning to see policymakers hint at returning to a time when supply and demand mechanisms were deployed by governments in order to control the economy. Specifically, in 2014 , the housing market.

Measures include the new Mortgage Market Review – the pre-mortgage interview recently introduced where lenders look beyond income to consider household expenditure as a factor before making a mortgage offer. Then in his Mansion House speech, the Chancellor of the Exchequer took his own supply and demand ‘baby steps’ in trying to make councils bring forward brownfield sites for development. There are some who say this should go further and developers should be given the right to build on the green belt.

How far it is politically advisable for the coalition administration to try and control supply-side market conditions with a more hands-on approach remains to be seen.

What would be helpful is certainty. The market doesn’t like uncertainty. Endless speculation about rises in borrowing costs at a time when, in my own commercial property sphere, investors are ready to commit to more than ‘baby step’ investments is probably more harmful than the level at which any actual rise will be pegged.

Will Mooney MRICS

Commercial, Cambridge

No comments: