Since the release last week of the minutes of the November 9 meeting of the Monetary Policy Committee (MPC), the markets have decided that UK interest rates have hit their peak for this cycle. The minutes revealed that two of the nine voting members had argued in favor of a pause. Back on November 15 the Bank of England (BoE) released its latest Quarterly Inflation Report, which forecast that inflation would exceed the 2.0% medium-term target only very slightly if interest rates remained at 5.0%. The Report seemed to conclude that interest rates may have peaked, but did warn that wage deals in the January pay round would have to be watched closely - a point reiterated by Governor Mervyn King in his subsequent news conference.
Our own feeling is that it's too soon to rule out another rate hike - the MPC's bias clearly remains toward tightening. But nor is a Q1 2007 increase to 5.25% necessarily in the cards. Uncertainty abounds, and the renewed slide in the dollar and jump in sterling will further muddy the data waters. As King put it earlier this month, "there is significant uncertainty about the outlook for inflation."
We do know that the MPC has been concerned about the marked revival in the housing sector this year, and has started to pay closer attention to M4 money supply growth rates (see Daily Global Commentary, October 30: UK Housing Market and Money Supply Data Still Buoyant). Today's consumer credit data from the BoE showed that Britons racked up nearly £10 billion in mortgage debt last month, the highest in just over three years, taking the annual increase up to 11.3% (11.2% in September). Approvals for future purchases also hit a near-three year high of 128,000, up from 127,000 in September and suggesting that the recent revival in house prices could continue into 2007.
Other housing market surveys have also been pretty robust. On Monday, the British Bankers' Association (BBA) reported that mortgage approvals rose 3.7% on the year in October, well down from the heady 22% level seen back in June, but still a steady increase. Data from Hometrack showed house prices rose an annual 5.3% this month, the fastest rate in two years and up from 4.9% in October. This echoed the findings from the Royal Institution of Chartered Surveyors earlier this month that house prices rose at the quickest pace in over four years during the three months to October. And, last week the BBA reported net mortgage lending rose by £5.5 billion in October, only just below the £5.6 billion average over the last six months, with gross lending at a monthly record for October.
So, is the housing market still buoyant or have consumers been busy locking in deals before the widely-expected rate hike in November? Today's data from the BoE included the finding that unsecured lending, which includes credit card debt, dropped to the lowest level of annual increase in well over a decade in October, suggesting that consumers are finally feeling some financial distress.
Meanwhile, today's final data on M4 money supply growth for last month confirmed an annual rate of 14.1%, down a touch from the 16-year high of 14.4% in September, but still a very strong pace of growth.
All told, this month's data have shed little light on where interest rates are headed in the first half of 2007. Q3 real GDP growth was confirmed at a healthy 0.7% on the quarter and 2.7% on the year, with stronger business investment offsetting weaker household spending. The BoE expects Q4 to be similarly strong and forecasts growth over 3.0% for 2007. Average earnings growth slowed again in the three months to September, coming in at 3.9% versus 4.2% in the three months to August. And, the annual rate of inflation held steady at 2.4% in October.
All we can do is reiterate the usual mantra of "watch the data." If earnings growth continues to abate, the January pay round is relatively well behaved, and wider consumer demand continues to show signs of coming off the boil, then the repo rate will stay at 5.0% through the first half of 2007. On the other hand, if inflation expectations start to ratchet upward again in the final weeks of this year (perhaps on another oil price spike?), money supply growth remains at heady levels, and consumer confidence re-emerges, look for a 25bp rate hike in February.
Then again, all of these conjectures could be thrown out the window if the pound manages to do something it has avoided for well over a decade, and reaches $2.
Meanwhile, look for the November surveys on consumer confidence from the GfK and distributive trades from the CBI tomorrow; the CIPS manufacturing PMI on December 1; the CIPS services PMI on December 5; industrial output data for October on December 6; and the final MPC meeting of the year on December 7. The meeting will not bring a change in policy, but it will be interesting to see what the minutes say (due for release December 20) about the outlook for policy in 2007.