Two in one day

First Bovis and now Redrow - both complaining of declining consumer confidence and both bleating on about the need to cut interest rates.

When the UK property market was on fire, the MPC opted out. It proudly declared that asset prices should not be a target for monetary policy. Now that housing is on the slide, the pressure is on for the bank to cut rates. This pressure is dressed up as concern about consumer confidence, but in reality, it amounts to monetary policy supporting the housing market.

However, in inflation terms, there is no justification for a cut in rates. Oil is about to cross the $100 barrier and all commodity prices are rising sharply. The Retail price index remains extremely elevated. An interest rate cut at this stage would only serve to add to inflationary pressure.

Can the Bank of England be relied upon to keep a lid on inflation? Probably not. Despite the MPC's protestations that asset prices don't matter, it was always quietly content to sit back and let the housing bubble take off. It seemed to make people happy, kept them spending and contributed to economic growth. Now that it is all falling apart, the MPC will try to avoid the inevitable slide into recession.

It is, however, too late. A cut in rates won't reduce the massive private debt burden out there. Furtheremore, it won't do much to spur on investment. It won't help the commercial banks clean out their rotten balance sheets. Only a painful "correction" will get us backt to where we need to be. Debts need to be repaid, house prices must come down, and inflation must fall. Any cut in rates will only delay this necessary but painful process.


Redrow alert fuels housing market gloom

A second leading UK housebuilder fell foul of the downturn in consumer confidence today as Redrow warned shareholders that completed house sales would probably slide by about 10 per cent in the first half.

The alert sounded fresh worries about the state of the UK housing market and came as the Bank of England's rate-setting Monetary Policy Committee met for the first of its two-day monthly sessions to decide on interest rates.

Economists said that the odds that the Bank will cut the cost of borrowing tomorrow in a swift move to head off the threat of a recession have "shortened significantly".

As well as weak retail sales figures from the CBI and the British Retail Consortium, economists argued that the sub-prime mortgage related woes at Citigroup and Merrill Lynch, both of which have axed their chief executives in recent days, have heighened worries about the global financial sector.

Howard Archer, chief UK and European economist at Global Insight, said: "A week ago, we had put the odds of a 25 basis point interest rate cut to 5.5 per cent at 20 to 25 per cent. We now see it at 35 per cent."

Mr Archer added: "Elevated oil and commodity prices, higher food prices and unfavourable base effects will exert upward pressure on inflation over the next few months, while latest survey evidence indicate overall that manufacturers and service companies are still relatively confident in their pricing power."

The housing market is not strictly within the Bank's remit to keep the lid on inflation, although it acknowledges the role the market plays in general high street confidence and consumer spending.