• Although the Monetary Policy Committee has now left interest rates on hold at 4.75% for six months in a row, a change in the cost of borrowing could come sooner than most people think. It is possible that the Committee may have one more interest rate hike up its sleeve, but I believe that the next move is more likely to be down.
  • Admittedly, the economic news has had a stronger tone in the last month. National Statistics estimated that GDP growth accelerated from 0.5% in Q3 of last year to 0.7% in Q4, leaving the economy expanding at around its trend rate.
  • There is also some evidence suggesting that house prices may have stabilised. Indeed, the Nationwide stated that house prices rose by a monthly 0.4% in January. Meanwhile, prices rose on the Halifax index by 0.8%, building on the 1.4% gain seen in December. Other measures, however, are still consistent with a sharp slowdown. The Land Registry stated that house prices fell by 2.7% in Q4 of last year, taking almost £5,000 off the price of the average property.
  • But in any case, the bigger picture is much more important than one month’s data. With industry firmly in recession, economic growth remains heavily reliant on consumers. But consumers may not be able to bear the burden for much longer. Indeed, they have already showed signs of tightening their belts as retail sales rose by just 0.4% in Q4 of last year – the smallest rise in just under two years.
  • And if the housing market slowdown continues, as it surely must given that prices remain fundamentally overvalued, it is fortunate that the MPC will find itself in a position where it can cushion the blow to the wider economy by cutting interest rates aggressively. 
  • I have previously said that the first rate cut could come in May, but this may clash with the general election. Moreover, the strength of the data in the last month suggests that rates may not start to fall until the early summer. This is now a more plausible timetable. But if the housing market data swing down again in the next few months and retail sales activity remains weak, an interest rate cut before the general election is not out of the question.
  • Whatever the precise timing, though, the key point is that the next move in interest rates is likely to be the first of a downward cycle that will leave interest rates at 4.0% by the end of this year and at 3.5% by the end of next year.

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