The Bank of England won’t raise its key interest rate for years as consumer spending stays weak amid an “absolutely dire” outlook for the U.K. housing market, according to Capital Economics Ltd. founder Roger Bootle.
“It’s going be very nearly a decade before consumer spending in aggregate returns to the same level it stood at before the economic downturn,” Bootle told a conference organized by the Institute of Economic Affairs and held at the Institute of Directors in London today. “Interest rates are going to stay at this level for years to come.”
The central bank expanded its asset-buying program by 50 billion pounds ($79 billion) and kept its benchmark rate at a record low 0.5 percent this month after the economy contracted in the fourth quarter. While a lack of homes for sale and buoyant overseas demand have supported house prices in London, values nationally have fallen as banks curtail lending and companies cut jobs.
“As the availability of mortgage finance gets tighter, that’s going to exercise an influence” on the housing market “and as unemployment rises, that too will be a negative,” said Bootle, a former adviser to the U.K. Treasury. “We’re going to see the real value of this very important consumer asset declining and probably the market stagnating.”
The Bank of England will also have to return interest rates to “normal” at some point, he said. “If the housing market is flat on its back and falling outside London when interest rates are at 0.5 percent, what’s it going to be like when base rates are 5 percent?”
“Probably what will happen is that prices just wriggle down a bit and earnings will continue to rise, so the adjustment will come gradually rather than suddenly,” he said.
Bank of England policy makers increased the target of their bond-purchase plan to 325 billion pounds on Feb. 9 after the economy shrank 0.2 percent in the last three months of 2011 amid a squeeze on consumers and Europe’s debt turmoil. Officials said the inflation rate, which fell to 3.6 percent in January from a peak of 5.2 percent in September, will drop to their 2 percent target by the end of this year.
“We’re going to see inflation continuing to fall down to about 1 percent or even lower” with the benchmark interest rate “remaining at this level also for years and years to come,” Bootle said. “I would do more” quantitative easing, “but I certainly don’t think it’s the answer to a maiden’s prayer.”