Banking on change

While it may not be wise to pre-empt the minutes of the Bank of England monetary policy committee's meeting on interest rates this month, it appears not to have been such a good few weeks for those keen to see the property market picking up again.

Firstly, any progress in reducing Libor levels to raise liquidity levels in the banking sector appears to be slow so far, something which may take months to filter through. Then there way the decision to hold the interest rate which, while predictable in the sense that the recent pattern has been for cuts to happen in alternate months - therefore making any change after the April trimming unlikely - was nonetheless disappointing for those hoping to see an easing of mortgage rates.

The bigger concerns will have emerged with the inflation report and this month's figures. The rise of the consumer prices index (CPI) figure to three per cent from 2.5 per cent in March may have been exactly the sudden surge in prices due to rising food and fuel costs that the February inflation report suggested. But the May report stated clearly that the Bank now expected this to be more protracted than before and noted that this had been taken into account by the MPC when making the May decision on interest rates.

Investors in property - as well as those concerned with various aspects of the economy - may now ask how willing the Bank may be to hold its nose and take the rap that comes with Mervyn King writing some explanatory letters about monetary policy to the chancellor if and when the CPI level rises above three per cent. Should the Bank, given the possible spectre of stagflation, hold rates and risk a greater downturn or be willing to cut them in the hope that the inflation storm will soon dissipate? In the inflation report the Bank acknowledged the task to "balance" these issues was
getting harder.

This may be where today's news that Rachel Lomax is to leave her deputy governor post - and with it the MPC - when her five-year term ends next month could be significant. If interest rates are to be relevant to mortgages, it has become clear enough that Libor must come down. On the assumption that this will happen over the coming months thanks to the special liquidity scheme, the setting of the base rate could grow in significance.

Different papers have already speculated about possible replacements for Ms Lomax, who so far this year up to April has voted with the majority each time rates have been discussed. These include Paul Tucker, the Bank's director of markets and Treasury ambassador to the City Sir James Sassoon. It is worth noting in the case of Mr Tucker that he is already an MPC member so another new member would have to be found.

Therefore, the issue of whether mortgage rates will come down in coming months may rest on the outcome of some close decisions as the Bank wrestles long and hard with the issues before it. In such circumstances, should the new appointee be a dove rather than a hawk, the prospects of action being taken which may bolster the property market could be that much greater.

Jim Barnaby is a real estate investment broker and successful property investment adviser delivering research and selected UK and overseas property investment solutions with experience in spanish properties, french property investment, German property, Cyprus holiday homes, Property in Cape Verde, German property investment, cape verde property buy to let property.