MPC's Barker plays down housing fears

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The Independent Online

Odds on a cut in interest rates lengthened yesterday. Most economists took remarks in a speech made by Kate Barker, a member of the Monetary Policy Committee, to mean that a reduction in the base rate from 5.75 per cent was unlikely at the committee's next meeting in a fortnight.

Ms Barker said a jump in mortgage costs might not "significantly" hurt the housing market because the momentum of growth will support consumer spending: "It is not clear why recent events should prove a trigger which significantly alters previous expectations of continued robust house-price growth. And even if there were a major weakening in the housing market, the response of household consumption may be muted." She conceded, however, that the buy-to-let sector may be a "potential source of weakness", as rents have not increased as fast as prices.

She also indicated that, during past crises, surveys of business confidence had tended to overplay the chances of a downturn. However, "the evidence from business surveys and housing market indicators will be an important part of my judgement over the next few months over how far the downside risks to the outlook have increased." She was, she said, concerned about the impact of oil prices and the exchange rate.

One of the key pieces of evidence, the CBI Industrial Trends survey, suggests that manufacturers have become pessimistic. A balance of 13 per cent of firms are less optimistic about the business situation than they were three months ago, the sharpest decline since January 2006. However, most analysts agreed that the figures were better when seen in the wake of the credit crunch. Previous episodes of financial turbulence have had a more dramatic effect on sentiment.

Ian McCafferty, the CBI's chief economist, said: "One concern is the rapid cost inflation across commodities, which is putting pressure on margins. So far the majority of businesses have been unable to pass these onto customers."

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