This Month Mervyn King Achieves His Aim Of Being Boring

Today’s decision by the MPC to leave Bank Rate and the Quantitative Easing programme unchanged was widely expected but next month the committee will have to consider whether to utilise the final £25bn The Chancellor has authorised for Quantitative Easing. If the MPC feel the need to either consult with The Chancellor on this or ask for authorisation to exceed the £150bn already authorised it looks very probable they will have to deal with a different Chancellor. However, as the Prime Minister was no doubt actively involved in the original decision to go down the Quantitative Easing route no doubt, assuming he has not been ousted by this time next month, his influence will mean that the basic policy won’t change. Although a few lenders increased the maximum loan to value at which their best rates are offered during the last month, others have either increased the rates on their fixed deals, particularly those lasting longer than 2 years, or withdrawn some of their deals completely and some have in fact done both. This partly reflects a small increase in swap rates but a more important factor for lenders appears to be a need to restrict the volume of new business. Maintaining service standards is the often reason given for this, and everyone agrees this is very important. However, there is no shortage of experienced mortgage personnel in the market at the moment and so lenders will have had no trouble staffing their back offices at the levels necessary for the amount of lending they want to do. Therefore, the basic reason for rates increasing or disappearing completely is to avoid exceeding the amount of lending the lender is willing and able to do, taking account of, among other things, commitments given to the Government and capital constraints. Despite the Bank of England having used £80bn of the funds it has agreed to commit under its Quantitative Easing programme it is hard to see any visible impact of this so far in terms of any real increase in mortgage availability. It may be that with the housing market performing better than virtually all the forecasts at the end of last year, albeit with activity still at a historically low level, the modest extra mortgage demand this has generated is enough to be the straw that breaks the camel’s back. With no slack in the amount of mortgage funding available and lenders currently having no ability to easily increase the amount of money they have available to lend, the only ways they can restrict demand are the time honoured methods of putting up their rates or withdrawing products. The former has the bonus side effect of increasing their margins and until the Residential Mortgage Backed Securities market reopens it is difficult to see where any significant additional funding is going to come from, apart from The Government. What is making matters worse is that the FSA now requires building societies to stress test their balance sheets for, among other criteria, a fall of a further 50% from today’s levels of residential property prices. Such an Armageddon type test might have been appropriate at the beginning of the credit crunch but this is a classic example of a regulator on the back foot because of earlier failures and now overreacting, just as some confidence is returning to the residential property market. Such an onerous stress test reduces lenders’ ability to lend and thus compounds the supply-demand imbalance in the mortgage market.