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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (7980)	6/17/2004 4:37:09 AM
From: zonder	Respond to of 116555

UK BoE's King On Interest Rates and The Housing Market Bank of England Governor, Mervyn King gave a speech 14 June to the CBI and an interview published the next morning's Glasgow Herald which focused on the likely path of interest rates and the prospect of a housing market correction. 1. The Housing Market On the housing market, King noted that the pace of growth in house prices (around 20% y/y) is unlikely to persist. He points out that the ratio of house prices to earnings is at a historically high level and that this ratio is "unsustainable". In passing he argues that there are, "some early signs from surveys of a slowdown in the housing market." This is significant given the latest survey from RICS which does indeed show a slowdown in house prices for the first time in six months. What has attracted the greatest attention from the UK media is King's barely concealed threat that, "So anyone entering or moving within the housing market should consider carefully the possible future paths of both house prices and interest rates." 2. Interest Rates King argues that the best CENTRAL scenario is that, "growth is likely to be robust over the next year and then ease back towards its long-term average." He mentions two risks to this scenario. One is the outlook for the manufacturing sector where he clearly indicates that he is suspicious of the weak official data - so there is an upside risk here. The other risk is that of a sharp housing market correction as discussed above. This is clearly a downside risk to the growth (and hence also to the interest rate) outlook. In his Glasgow Herald interview King argues explicitly against a mometary policy stance which relies on "shocks" or "surprises". He puts forward the view that, "The idea that we should penalise the economy to draw attention to interest rates...would, "defeat the point of the exercise." "Unless something very surprising happens in the economy, we do not intend to inject surprises for the sake of it." Referring to the acceleration in the pace of tightening in the last two months he notes that, "While it was appropriate to be cautious" when the tightening cycle began in November, "the need for caution is now less." Conclusion: King is reiterating the Bank's commitment to a "less cautious" policy on tightening. The idea that King will now opt for consecutive rate rises in July and August does not fit with the way we interpret King's words. A less cautious approach to monetary policy is not the same as an aggressive policy. King explicitly argues against surprises and shocks.