U.K. Mortgage Rates Surge, Consumer Confidence Slumps (Update2)
By Brian Swint
July 9 (Bloomberg) -- U.K. mortgage rates surged to the highest in eight years and consumer confidence dropped as the worst housing slump in three decades deepened.
``This is doom and gloom,'' said Alan Clarke, an economist at BNP Paribas SA in London. ``The housing market is in freefall and unemployment is rising.''
The rate on a home loan fixed for two years rose to 6.63 percent in June, the highest since February 2000, the Bank of England said today in London. The 0.37 percentage point increase from a month earlier is the biggest since October 2003. Nationwide Building Society's index of consumer sentiment dropped to the lowest level since the survey began in May 2004.
The U.K. is skirting a recession as house prices fall, oil costs rise to a record and lenders refuse to pass on the Bank of England's three interest-rate cuts since December. Policy makers, who make a rate decision tomorrow, said last month that they considered increasing borrowing costs after inflation accelerated to 3.3 percent, the fastest pace in at least a decade.
``The Bank of England's credibility is in question with the worst peak in inflation in its history, but there are a lot of reasons not to hike now,'' BNP's Clarke said.
Rate Decision
All but one of 49 economists in a Bloomberg News survey predict the Bank of England will keep the key rate unchanged at 5 percent tomorrow. Nationwide said there is a 20 percent chance that the bank will raise interest rates.
Evidence of the economy's deterioration sent the pound lower against the euro today. The currency fell to 79.59 pence from 79.57 pence yesterday.
House prices fell the most since 1992 in June, Nationwide said July 1. Unemployment may rise 58 percent to 1.3 million by the middle of 2010, the Centre for Economic and Social Inclusion, a government-supported research group, predicted this week.
Homebuilders Redrow Plc and Bovis Homes Group Plc today said they will cut their workforce by 40 percent as sales drop. Persimmon Plc said yesterday it eliminated 1,100 jobs after the housing slump lowered first-half sales by 34 percent.
``The state of the housing market is of grave cause for concern,'' Harriet Harman, deputy leader of the ruling Labour Party, said in Parliament today. She said the government and the Bank of England will fight inflation even as economic conditions threaten to ``get tougher.''
Policy Disagreement
Policy makers John Gieve, Timothy Besley, Paul Tucker and Kate Barker, who testified before a U.K. parliament committee on June 26 with Bank of England Governor Mervyn King, all said they considered advocating higher interest rates last month. The nine- member panel voted 8-1 to keep the main rate unchanged. David Blanchflower supported a reduction.
Inflation climbed to 3.3 percent in May, the fastest pace since at least 1997, and King said last month that the rate may exceed 4 percent later this year. In May, he predicted that the economy may see the ``odd quarter or two'' of contraction as consumers pare spending.
Inflation has also accelerated because the weakness of the pound is driving up import prices. The pound fell 13 percent in the past year against a basket of the U.K.'s main trading partners. The goods trade gap stayed at 7.5 billion pounds ($15 billion) in May, the statistics office said today.
More than half the respondents in the Nationwide survey expect the economic outlook to worsen over the next six months, and around 70 percent predict their incomes will stay the same in that period, the report showed.
Consumers ``are recognizing that the economy is weakening, and that's going to affect them,'' said Fionnuala Earley, chief economist at Nationwide, in an interview on Bloomberg Television. ``The next move in rates will be down, but it will be much later this year or next year.'' |
