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October 31, 2006

UK Housing Market And Money Supply Data Still Buoyant
by Victoria Marklew

Sterling jumped to a 15-month high £0.6682 against the euro this morning after data on the housing market and money supply underpinned expectations for a rate hike from the Bank of England (BoE) next week, and for additional tightening in early 2007. While we are cautious about reading too much into one month's data, the members of the Monetary Policy Committee (MPC) have not only voiced concern about the marked revival in the housing sector this year, but also have started to pay closer attention to M4 money supply growth rates. And, based on today's data, it does look as though the MPC is going to remain in a tightening mode beyond next week.

The BoE's September consumer credit data showed that mortgage approvals hit their highest levels in two-and-a-half years last month, standing at 126,000, up from 120,000 in August. This points to continued buoyant house price growth in the coming months. Net consumer credit rose again in September, and mortgage lending was also robust, rising 11.2% on the year (11.1% in August). Clearly, the surprise 25bp rate hike in August did little to dampen the housing market.

Final data on M4 money supply growth for last month confirmed an annual rate of 14.5% - up from 13.7% in August and the fastest pace of increase in 16 years.

BoE Governor Mervyn King mentioned accelerating money supply growth in a keynote speech earlier this month, and other members of the MPC have started to draw attention to it. While there may be some evidence of softening in the labor market (see Daily Global Commentary, October 18: BoE To Hike On November 9, But What Happens In 2007?), there is certainly evidence of an ongoing recovery in household spending. All of this tilts the odds in favor of the BoE remaining hawkish after the expected November 9 rate hike.

Victoria Marklew
The Northern Trust Company
Economic Research Department
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Copyright © 2005-2008 The Northern Trust Company

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