The Daily Telegraph, May 14, Roger Bootle
On both sides of the Atlantic, people have recently been acutely worried about how the banking system would cope with higher interest rates.
Yet last week’s decision by the Bank of England to raise interest rates by 0.25 percentage points hardly caused a stir. Why would it? The move had been widely expected.
But this doesn’t mean that we are now done with worries about how higher interest rates will affect the financial system.
The Bank of England apparently believes in what the markets have dubbed “immaculate disinflation”. According to its new forecast, the UK will now avoid recession and inflation will fall sharply to only 1pc in two years’ time.
The financial markets expect two more 0.25 percentage point increases in Bank Rate. If this is what happens, medium- and long-term interest rates shouldn’t turn a hair.
But if Bank Rate has to go above 5pc and/or stay at the higher level for longer than the markets currently expect, then gilt yields would rise, with knock-on effects on longer rates throughout the system, including fixed rate mortgages and the valuation yardsticks for commercial property.
Residential property commands much more popular attention than commercial. Understandably. People live in it and they either own a piece of this market or regularly pay through the nose in rent because they don’t. Moreover, the value of the residential property market is about 14 times the value of the commercial one, which covers shops and retail parks, offices and industrial assets.
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