No succour from Bank for beleaguered house market

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The Bank of England's decision to hold interest rates at 5 per cent caused widespread disappointment yesterday. While it came as no surprise, the Monetary Policy Committee's announcement came on the same day that the Halifax reported a 22 per cent annualised rate of decline in property prices and official statistics revealed that private housing starts are down 35 per cent on last year, prompting many to call for a change of strategy from the Bank.

Michael Coogan, the director general of the Council of Mortgage Lenders, said that "a reduction would have been a welcome recognition of the current financial strains on households already struggling with hikes in other living costs".

The Royal Institution of Chartered Surveyors' chief economist Simon Rubinsohn echoed the sentiment: "Survey reports and hard data point to further deterioration in the economy, with the beleaguered state of the housing market exacerbating the extent of the downturn. The MPC will need to ease policy as further evidence emerges that rising food and fuel prices are not becoming entrenched in the wage bargaining process. This should be visible later in the year."

The TUC similarly called for urgent action: "While the Government talks of the need for an economic recovery plan to restart growth in the UK, the Bank is doing all it can to hold down consumer confidence and business investment. This is not the time to be holding rates when the prospects for the economy in 2009 look increasingly weak. The Bank should cut and cut fast."

Next Wednesday's quarterly Inflation Report from the Bank will reveal the reasoning behind today's decision. The MPC would have been informed in advance about the July inflation figures, which will be published next Tuesday and are likely to see the consumer price index top 4 per cent. Many economists now see inflation peaking at just over 5 per cent this September, reflecting rapidly rising gas and electricity bills.

The MPC will also have been conscious of the pressures facing the wider economy, and especially the housing sector. The Halifax reported a fall in house prices of 1.7 per cent in July alone, leaving property values down 8.8 per cent on the same month last year.

Taking the last three months' figures puts the fall in house prices at an annualised 22 per cent, with widespread fears that worse is to come. A Reuters poll of analysts found average expectations of a fall of 7 per cent this year and 9 per cent in 2009.

One problem has been the speculation about a possible change in government policy on stamp duty. The RICS said some buyers may delay moving in the hope of making a saving if stamp duty is suspended or postponed for them as part of the Government's economic recovery plan next month.

A lack of funds flowing into the housing market as the credit crunch bites has seen a collapse in the building industry. The Office for National Statistics revealed that the construction industry's orders fell 21 per cent in the second quarter of this year compared with a year earlier.

The European Central Bank likewise kept rates on hold yesterday, at 4.25 per cent, having raised rates last month.