BoE lowering rates
Bloomberg News
Here they talk about lowering the BoE rate to avert a recession. Which has a double effect for landlords
Borrowing gets cheaper and debt balance is devalued due to inflation running above the BoE targets:
Bloomberg News
BOE Walks `Tightrope' on Interest Rates, Bean Says (Update1)
By Brian Swint
April 18 (Bloomberg) -- Bank of England Chief Economist Charles Bean said that policy makers are walking a `tightrope'' as consumer prices rise and the worldwide seizure of credit markets exacerbates the economic slowdown.
``Inflation is likely to exceed 3 percent again during the second half of this year,'' Bean said yesterday in London. ``The dislocation in credit markets has worsened, but pricing pressures have also intensified. We will be unveiling new projections that take these developments on board'' in May.
The comments suggest Bean remains comfortable with the pace of interest-rate reductions by the U.K. central bank after three cuts since December to 5 percent. While speculation of falling rates to avert a recession pushed the pound to a record low against the euro this week, Bean's remarks also suggest inflation may match the highest level in a decade this year.
``So far, we have judged that a relatively modest easing in bank rate was warranted,'' Bean said. ``That easing has roughly offset the rise in the cost of borrowing to households and businesses occasioned by the credit crunch, leaving the substantial fall in the exchange rate to act as the main offsetting influence on demand.''
The pound has dropped 13 percent since July against a basket of the U.K.'s major trading partners and reached a record low of 80.99 pence per euro on April 16. The declines may be ``roughly'' equivalent to the effect of the pound's exit from the European Exchange-Rate Mechanism in 1992, he said. The currency traded at 79.88 pence today in London.
Market `Dislocation'
``That should go some way to offsetting the contractionary impact of the dislocation in credit markets,'' he said.
Bean predicted that bank losses from the U.S. subprime mortgage market slump may be ``considerably smaller'' than the International Monetary Fund's forecast of $450 billion, if assets are held to maturity.
``We are well down the revelation path, at least in regard to losses associated with the U.S. subprime mortgage securities market,'' Bean said.
Credit costs have surged in Britain since the seizure of money markets last year, and Bean said that this has ``impaired'' the transmission of monetary policy. Lenders including HBOS Plc, Barclays Plc and Lloyds TSB Group Plc have raised the cost of mortgages even after the bank's rate cuts.
``The bank is continuing to work with the relevant parties to develop approaches that will help to ease the strains,'' Bean said yesterday. Still, ``growth is likely to continue to weaken this year. That in turn will open a margin of spare capacity which will help to bear down on inflation, bringing it back to the 2 percent target over the medium term.''
Inflation Risk
Record costs for oil and other commodities threaten to raise consumers' price expectations, requiring the economy to slow more than otherwise to bring inflation under control, Bean said. Inflation was 2.5 percent in February, matching a nine- month high, after gas and electricity prices rose. Oil prices climbed to a record $115.54 a barrel in New York yesterday.
Bean's forecast of a ``likely'' overshoot of the government's 3 percent limit would require Bank of England Governor Mervyn King to write to the government with an explanation for only the second time since the bank's decade- long history of setting interest rates.
At the same time, slower economic expansion is likely to ease inflation, Bean said. The IMF says U.K. growth will cool to 1.6 percent this year from 3 percent in 2007, the worst performance since the end of the last recession in 1992.
`Green Light'
``They're giving the green light for further cautious easing,'' said James Shugg, an economist at Westpac Banking Corp. ``Bean is saying that the slowing economy will sort out inflation. While they're worried about 3 percent, the bank sees underlying inflation slowing further.''
House prices fell the most since 1992 in March, according to HBOS. The Royal Institution of Chartered Surveyors says the number of real-estate professionals saying prices declined exceeded those reporting gains by 78.5 percentage points last month, the worst since records began in 1978.
``I am reasonably sanguine about the implications of any fall in house prices for consumer spending'' because they are both driven mainly by income expectations, Bean said.
``However, household spending growth is likely to be subdued for other reasons,'' namely slower employment growth and the limited availability of credit, Bean said. He predicted ``pretty chilly'' conditions for retailers.
``The Monetary Policy Committee has to balance off the consequence of these two shocks for inflation against each other,'' Bean said. ``In doing so, we are walking a tightrope.''
