Bank of England’s interest rate decision is finely balanced

Larry Elliott
Photograph: Yui Mok/PA

Evidence of a post-election bounce in the economy continues to mount. Business surveys have detected a recovery in both confidence and activity. Companies are starting to unfreeze investment plans. And, according to the Nationwide, house prices are starting to pick up.

To be sure, boom conditions are still a long way off. Annual house price inflation may be at its highest level in 14 months, but still stands at a modest 1.9%.

But the election result does seem to have been the catalyst for a recovery in demand for residential property that was waiting to be triggered throughout 2019.

Two factors have been at play. The first is the highly competitive state of the mortgage market. Lenders are falling over themselves to provide home loans at ultra-cheap rates. At the start of 2019, the average interest rate on a five-year 75% loan to value mortgage stood at 2.09%. By December it was down to 1.69%, only slightly higher than the 1.3% inflation rate.

The second factor is the state of the labour market. Although the economy’s growth rate slowed down in 2019, employment still rose and the jobless rate stood at its lowest level since the mid-1970s. What’s more, pay rose more rapidly than prices. Potential home buyers were reasonably sure that they weren’t going to lose their jobs and their real wages were also going up. All the conditions were in place for a surge in activity.

The election has given an added twist to the market because buyers think that the market has reached a trough and want to get in before prices start to rise. In reality, a real surge in house price inflation of the sort last seen in the mid-2000s seems improbable this year, because houses are still expensive relative to income and it is unlikely that Britain’s departure from the EU this week will mean an end to Brexit uncertainty. A short spurt of activity in the housing market looks more likely than a protracted upswing.

That said, the Nationwide survey makes the Bank of England’s interest rate decision on Thursday even more finely balanced.

The position is relatively simple. All the backward-looking data is poor and inflation is well below the government’s 2% target. All the forward-looking data has been strong and the chancellor, Sajid Javid, is cooking up an expansionary budget for March. At its last meeting, the Bank’s monetary policy committee voted 7-2 to keep borrowing costs on hold at 0.75%. It looks like being closer this time.

More common sense on corporate governance, please

Here’s news to gladden JD Wetherspoon’s Tim Martin, the scourge of corporate governance box-tickers: the Investor Forum, the lobbying club of big investment houses, thinks he has a point.

In the forum’s annual report, its executive director, Andy Griffiths, did not go so far as to endorse Martin’s view that corporate governance in the UK is “up the spout”. But he did metaphorically lean across the bar and sympathise.

Many chairs of public companies, says Griffiths, “say they would be ‘better off’ managing private companies given the constraints that the public markets impose”. One answer, he says, is that investors should strike the right balance between holding companies to account and “any perception of a prescriptive application of proxy guidelines”.

That sounds correct. The best part of Martin’s criticism last year was aimed at “one-size-fits-all” box-tickers and he was right to rant. Elevating a set of governance recommendations into a rigid universal formula is silly. Proxy agencies, to which too many investors lazily outsource their thinking, can be the worst offenders.

In Wetherspoons’ case, it’s a successful business with a big 32% shareholder (Martin himself) that could reasonably expect leeway to divert from the UK governance code recommendation that non-executive directors should be kicked off the board after nine years.

The key issue is the quality of the explanation. After all, the code is built on a “comply or explain” principle. Martin’s detailed plea was good: doing things differently is how Spoons prospers, he said.

But chairman of public companies could also help themselves here. Too many, when confronted with criticism, summon their investor relations operatives to repeat tired lines mechanically, That’s just as bad as box-ticking.

This territory may sound niche but confidence in public markets matters. The number of quoted companies has plunged, restricting the investment choices of millions of ordinary savers and making it harder to scrutinise companies.

Private equity’s land-grab won’t be reversed easily in an era of cheap money. But less box-ticking, and more common sense, on governance in the public sphere might help. Nils Pratley

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