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UK Interest Rates Remain At 0.5%

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There have been no surprises today from the Bank of England (BoE) as its Monetary Policy Committee (MPC) complete their monthly meeting. UK base rates will remain at the 0.5% level that they have been at since March of 2009. The Asset Purchase Facility will also remain at the £375Bn level it rose to in July 2012 as the Bank opts not to adjust it’s quantitative easing program.

We must wait for the minutes of this MPC meeting to discern where the focus for discussion lay among the Bank’s governing members. It is however likely that Britain’s property market took a central part in the deliberations, particularly following figures this week showing house prices growing at around 10% per annum and a warning to Britain from the OECD about controlling this excessive growth.

Beyond base rate adjustments and controlling the money supply there is in reality little that the MPC can do to influence house price growth. The related Financial Policy Committee (FPC) better serves this task. The FPC was established in the wake of the financial crises and has the powers to set macroprudential policy within the UK’s banking system, this enables regulatory adjustments to be made in order to control the effects of financial institutions actions on the underlying economy.

There are currently a number of options open to the FPC to attempt to cool a growing house price index. The front runner likely to be considered when the FPC meets next month is the imposition of a maximum loan-to-value rule on mortgage lenders, this would dampen immediate housing demand and spread the growth out over a longer time frame as house buyers need more time to save larger deposits. A second area of consideration would be to increase bank capital requirements related to mortgage lending, this would reduce the availability of mortgages within the economy and consequently further contribute to a cooling of the house price market.

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