Cover of MoneyWeek magazine issue no 508

Magic metals

15 October 2010 / Issue 508

The new scramble for 'rare earths'

PLUS:

  • Buy this bargain milk producer
  • The scandal in the American mortgage market
  • Superstars of the next internet boom

Excerpt

Why interest rates won’t budge

I wrote a few weeks ago on our blog about how we’re all being asked to pay quite a high price for the government’s desperate effort to keep house prices high. Low interest rates might be helping the overstretched to stay in houses they couldn’t otherwise afford, but they are also stamping on the returns from our savings and allowing inflation and inflation expectations to bed down, I said.

Things haven’t got any better since. Inflation has stayed high (3.1% on the Consumer Price Index and a frightening 4.6% on the Retail Price Index), with rising food and clothing prices acting as a nasty reminder that modern China is a force for inflation, not for deflation.

And house prices, which are already 20% or so off their peaks in real terms, are falling anyway. The Halifax index shows prices down 3.6% in September and the just-released RICS numbers, for what they’re worth, have 44% of surveyors reporting a fall in prices over the month and just 6% reporting a rise. This trend is set to continue – all agents are reporting rises in sales instructions, but the tight mortgage market isn’t going to let buyers properly loose on those instructions for years to come. Note that the number of first-time buyers fell another 5% in August.

You might think that high and persistent inflation will soon be enough to make the Monetary Policy Committee raise interest rates. But it won’t be.

• Read the full editor’s letter here:
Why interest rates won’t budge