MPC member states falling house prices pose threat to economy
February 29, 2008
A member of the Monetary Policy Committee, Kate Barker, recently stated that falling house prices coupled with decreased lending levels posed a significant threat to the UK’s economy over the short term. She said that the Monetary Policy Committee would be looking carefully at financial and property markets when it came to setting interest rates, but also added that it would be difficult to justify cutting rates when concerns over inflation were so high.
She stated: “The risk I believe to be of most concern is around the interplay between the property market and the financial sector resulting from the credit turmoil. If credit tightening were to prove more severe than in the MPC’s present central projection, leading to a significant fall in lending to households and companies, this could prompt a further decline in property values.”
She added: “The consequent adverse impact on growth could prove difficult to turn around quickly, potentially resulting in a protracted period of low output growth and below target inflation.”
Officials from the Council of Mortgage Lenders have expressed concerns over the extent of the damage that could be caused to the housing market as a result of the global credit crunch. This is partly due to the difficulties that banks are facing in raising the money that they need in order to cover their lending commitments, which has resulted in far tighter lending conditions.
Barker said: “A prolongation of the present difficulties in accessing wholesale funds could restrict the quantity of mortgage lending during 2008. In this case, the mortgage market could become less competitive and more expensive, feeding back into a decline in the housing market, somewhat lower consumer spending, and also into lenders’ balance sheets, reducing lending capacity further.”
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