Market update - rates, banks and housing market

Posted on 19 August 2009 by Drew

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Rates

•    Bank Of England rate  - 0.5%  - kept on hold (next decision 10th September)
•    ECB  rate kept on hold at 1%  - (next decision 3rd September) 

Minutes of the MPC meeting on 6 August reveal that the Governor of the Bank of England and 2 others, wanted to pump more money into the UK economy  but were outvoted by fellow policymakers. Mr King wanted £75bn rather than the £50bn that was injected.

The decision to pump £50bn came as a surprise, and was already twice the £25bn that the market expected. The minutes back up the Bank's statement earlier this month, saying that the UK recession "appears to have been deeper than previously thought".

But the 6-3 split on the MPC shows that views within the bank differ on just how deep the recession is, and the outlook for inflation.

Analyst Peter Dixon at Commerzbank  said, "It was surprising we had three members looking for £75bn. This clearly suggests the bank is leaving the door open for additional measures should they feel need a rise. Quantitative easing is still very much in play."

The committee noted that stock markets had "increased considerably", and that Libor, had fallen. It also noted that there were "promising signs" that quantitative easing was "having a positive impact". However against this, the committee said that lending conditions remained tight, economic activity remained weak and the "recovery in global demand remained susceptible to further shocks". These factors would, it said, "most likely lead to a slow recovery in the level of economic activity", which meant further action needed to be taken.

While six members of the committee voted for a £50bn expansion in quantitative easing, the governor, along with Tim Besley and David Miles, voted for a £75bn expansion, arguing that too little stimulation would mean inflation remaining below its target of 2% for "a sustained period of time... and might harm public confidence in the recovery, causing it to falter". They added that if £75bn proved to be too much, they could reverse the policy, by selling assets, and increase interest rates.

All nine members of the committee voted in favour of keeping interest rates at 0.5%.

Banks     
 
The KPMG UK Banks Performance Benchmarking Survey has suggested that the retail arms of the UK's High Street banks are likely to see losses in the second half of 2009.  The survey also says that despite modest profits in the first half of the year, bad loans would lead to losses, and that these losses from bad loans will not peak "until 2010 or beyond."

"Retail banking is just profitable at lower levels, but with rising impairments. It seems probable that it will fall into loss making in the second half of the year," says KPMG. They add that competition for savings accounts and the increased cost of lending between banks has impacted retail banking. Looking ahead, KPMG says that continued uncertainty in the mortgage market will make life difficult for retail banks.

UK Mortgage / Housing Market   
 
According to CML data, six mortgage lenders increased their hold over the market for new UK home loans in 2008.

•    The top six, led by the Lloyds banking group, accounted for 78% of all new loans, compared to 72% the year before.  
•    After Lloyds, the biggest lenders in 2008 were Santander, the Nationwide, Barclays, RBS and HSBC.
•    Overall new lending fell by 28% last year, with many specialist lenders being driven out altogether.

The CML said the credit crunch, which started in 2007, had dried up the supply of mortgage finance. "The lending community itself has undergone... dramatic changes," the CML said. With so many lenders either merging or ceasing lending, this year's largest lenders' table has changed more than in other years," it added.
A key factor was Northern Rock dropping out of the top-ten mortgage lenders as a result of its insolvency in 2007, when it accounted for 8% of all new lending, as opposed to 2008 when it lent just 1.1% of new mortgage funds.

The CML said another factor was that specialist lenders - those which did not depend on savers' money to finance their lending - had fallen from a 7% share of new lending to just 2%, and of a much smaller market.
 Our Guru, Ray Boulger  is quoted as saying "borrowers were now receiving the worst of all possible worlds. If you have fewer lenders you have less competition," he said. "Those lenders still in the market have only limited amounts to lend, so they aren't competing hard with each other if borrowers have less than a 25% deposit," he added.

Building societies were also badly affected by the drying up of funds from the wholesale banking markets, with the Nationwide taking over the Cheshire and Derbyshire building societies, and mergers between the Scarborough and Skipton, the Catholic and the Chelsea, and the Barnsley and Yorkshire building societies. "We may not have seen the end of the current wave of consolidation," the CML warned. "So, next year's table is likely to look different again, with more new names and an even larger market share in the hands of the largest firms," it added.

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