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13/02/06 - Interest rates unchanged.

Following the Bank of England�s decision to leave interest rates unchanged at 4.5% in February for the sixth month in a row, the Council of Mortgage Lenders says it expects interest rates to remain unchanged for the next few months at least.

The CML says the economic outlook for 2006 remains benign with growth averaging 2-2.5% and consumer price inflation close to 2%. Mortgage approvals for house purchase continue to be strong, indicating healthy transactions and house price growth over the next few months.

The CML notes mixed signals from the household sector. The strengthening trend in retail sales evident since the spring continued in December and there was a sharp improvement in consumer confidence in January. But the British Retail Consortium reported weak sales in January.

Confidence typically jumps in the New Year, but this year�s rise was stronger than usual, while the steady pick up in retail sales growth is what might be expected given the strengthening in the housing market. Identifying underlying trends around the turn of the year is notoriously difficult, but on balance the CML says the underlying growth of household spending has strengthened.

Housing market activity has remained unseasonably strong in recent months, with rising transactions and renewed upward pressure on prices. Nationwide reported a rise in house price growth to 4.4% in the year to January. This compares with a low point of 1.8% in September. Prices rose by 1.4% in January alone. This was the strongest monthly figure since July 2004. The monthly rate of increase has averaged 0.8% since October compared with less than 0.1% between May and September.

Halifax says house prices rose by 5.1% in the year to January, picking up from a low of 2.3% around mid-year. Prices fell by 0.4% in January. This was the first monthly fall since May. The bigger picture is one of considerable strength since the summer, with the monthly increase averaging 0.75% over the past six months compared with essentially no change over the previous six months.

Surveyors and estate agents continue to report a move towards better balance between supply and demand. The Royal Institute of Chartered Surveyors reports the number of new sellers is not high enough to satisfy current demand conditions in the early part of this year. As a result, upward pressure on prices is likely to continue. Hometrack data show that the average time to sell a property has stabilised over the past six months, albeit at a high level. Also, the sale price achieved as a percentage of the asking price has been rising since November, while the average number of viewings per sale and the percentage of sales falling through have both declined. Price rises have been strongest in London and the South-East. There is some evidence that large City bonuses are supporting activity.

HM Land Registry figures show a fall in the number of residential property sales to 258,763 in Q4 from 297,453 in Q3. The data are not seasonally adjusted and are subject to upward revision as outstanding sales are processed. Past patterns point to an eventual Q4 figure closer to 290,000. For 2005 as a whole, sales are likely to have been about 17% lower than in 2004. Sales strengthened appreciably in the second half of 2005.

Seasonally adjusted gross mortgage lending rose by 3% in December to a new record level of �27.7bn, nearly a third higher than a year earlier. Early indications are that seasonally adjusted gross lending in January is likely to have been close to December�s record level. Net lending increased by 2% in December to �8.8bn. This was the strongest figure for 18 months. Underlying growth in mortgage lending outstanding remains above 10% and has accelerated a little in recent months.

Financial markets continue to expect interest rates to remain essentially unchanged over the next couple of years, something the CML thinks is broadly correct. As a minimum, there needs to be clearer evidence on the underlying strength of household spending and wage settlements and this will not be in place for a couple of months yet. A reduction in rates in the spring remains possible, but it would be unlikely to herald a series of cuts.

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