Who turned up the heat?

Mark Posniak - 09 July 2010

I'm sitting in my speedos as I write this, getting funny looks from my colleagues, but then what can you do? Today is the hottest and muggiest day of the year yet and after the journey in on the tube I just had to rip off the pinstripe. Well they say Fridays are dress-down days.

Thankfully it's the weekend tomorrow and I hear the mercury is set to go even higher. Bring it on. Something else that's set to go higher, if not tomorrow, is the base rate.

Yesterday's announcement by the MPC saw the Bank of England maintain Bank Rate at its record low of 0.5 per cent for the 16th-consecutive month.This was widely expected - in fact it was pretty much a given. In a funny turnaround, it will actually be the minutes this month that are more interesting than the decision itself. The minutes will offer a strong clue as to when the base rate will finally rise.

The hawks, led by Andrew Sentance, are certainly beginning to circle. Sentance is arguing for a 0.25 per cent increase, citing stubborn inflation. Last month, he was in a minority, outvoted 1-7 by MPC members. But that may well have changed this month as there are rumours of growing dissension. The minutes should give us an idea of how opinion is shaping up.

When rates do rise, they will naturally add to the headwinds facing borrowers and the property market. But rate rises are a necessary evil, a key step back to a more normal functioning of the economy and lower inflation.

Even when they do rise, we expect the percentage increases to be small and incremental and this - coupled with the fact the market has already begun to price them in - is unlikely to put the property market into reverse.

The important thing is that the up-cycle, when it does commence, is managed smoothly to avoid shocks and enable the economy, markets and borrowers to adjust. Oh, and by the way, I was joking about the speedos.