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The likelihood of a further interest rate rise next week were raised significantly this Tuesday when the deputy governor of the Bank of England said current rates were too low to curb credit and demand growth.

In explaining his decision to vote for a rate rise this month, Sir John Gieve, the bank’s deputy governor for financial stability, said the danger of a loss of economic growth was preferable to taking a risk with inflation and the Bank of England’s credibility.

According to the London Financial Times -

The risks were that “we may increase interest rates too fast or push them up too far, with an unnecessary loss of growth, and second, that we may raise rates too slowly with a cost in higher inflation and potentially higher interest rates and a sharper slowdown in the end”.

In a speech at the University of Surrey, Sir John said: “I felt that the impact of moving too slowly on the credibility of the regime and thus the future prospects for the economy was of greater concern, given the robust rate of growth, than an unnecessary slowdown in activity.”

A recent poll by reuters of 64 economists indicated that 66% expected rates to rise from its current rate to 5.75 percent next week. The financial markets have been generally more bearish and have priced in further rates, with many commentators talking about potential ’shock and awe’ 0.5 percent increase being on the cards.

With the British now owing 164 percent more than they earn the interest rate hikes may help to slow the runaway housing market. It’s ironic that the British obsession  with housing, most encouraged by the government, may end up being the reason the next prime minister’s reign will be viewed as one mired in seventies like depression.

HMV Group has been on the sidelines recently as far as news is concerned. There has however, been much whispering going on behind closed doors it seems.

With results out this week looking to be dismal there doesn’t seem to be much going for the company - yet in the last few weeks the stock has gained significant ground, rising by more than 15% in the last 3 weeks.

So what’s going on? Well there are two schools of thought, first is that the company is likely announce a sell off of significant chunk of its business based in the far east, Japan to be specific. This sale could raise up to £75m.

At the same time rumours are starting to lift again that the company is ripe for buyout. Last year Permira offered a rumoured 210 per share. 

HMV is also rumoured to be cutting back 10% of the 330 stores its Waterstones group owns in an effort to cut costs.

The figures expected this week will not reflect recent cutbacks, which have been too recent to affect short term results.

The company has hired N.M. Rothschild & Sons Ltd. to advise the company on how to refinance its debt, the Sunday Express reported, citing a person close to HMV.

With the current whirlwind of M&A sweeeping through the city, speculation is that HMV may be ripe for an overhaul.

Dire predictions from the NH&PAU that the bottom quarter of or population will never be able to afford housing. Not since Margaret Thatcher walked the floor boards of number ten have things looked so bad for the more vulnerable in our  society. From BN … 

According to the National Housing and Planning Advice Unit, by 2026 the cheapest 25 per cent of houses will be worth ten times the earnings of the poorest 25 per cent.Apparently, at the moment the ratio is seven times and a decade ago itwas just four.

The unit is chaired by former Bank of England Monetary Policy Committee member Stephen Nickell. He said: “The forecast is of course uncertain but given the current conditions the probability is that the market will go up quite a bit more.” In fact, Mr Nickell is predicting continuation in house price inflation, although he admits that if rates hit 6 per cent soon, there could be a housing slow down for awhile.

Clearly there is a growing and potential chronic shortage of homes. But even so, ten times earnings?

Let’s assume disposable income is 50 per cent of earnings and interest on mortgages is 5 per cent. Assuming house prices rise to ten times earnings, that would mean a 100 per cent interest only mortgage would equate to 100 per cent of disposable income.

As we’ve pointed out in previous articles, it seems to be the poor who’ve been left behind since the current Labour party  have been in power. For all the party’s talk of socialism and looking after the vulnerable there seems to be a hollow ring to the tone.

Will Gordon Brown make up for previous sins -only time will tell - but then, hasn’t he already had plenty of time.

As storm clouds gather and the UK suffers unseasonably bad weather, reading the press over the last few days it seems that further bad news is on the way. Is it just a gloomy time of the year or did the UK have it too good for too long? Is Gordon Brown about to reap that that he sowed?

From the FT today…

Up to a million homeowners could see their mortgage repayments jump by almost a third in the next 12 months as they approach the end of cut-price mortgage deals.

Four interest rate hikes in the past 10 months mean that borrowers are now facing a ticking time bomb as they near the end of two- and three-year fixed-rate mortgages taken out in 2005, which are now poised to shift on to more expensive rates. The problem is also backloaded to the end of this year because there were a number of good deals around in the latter half of 2005 after the rate cut in August of that year. About £200bn of mortgages – approximately 20 per cent of the UK mortgage market – moved onto fixed-rate deals in 2005, according to new research by analysts at Credit Suisse. Credit Suisse estimated a large chunk of these mortgages would be written on two- or three-year fixed-rate deals because these were the most commonplace in the market. Jonathan Pierce, banks analyst at Credit Suisse said these fixed-rate mortgages were now coming to the end of their deals and up to a million households could face higher payments. “For some customers we see a 25-30 per cent increase in interest payments,” he said.

He said the payment shock could lead to higher arrears as more consumers who might have overstretched themselves to get onto the housing ladder struggled with the increased payments.

In some cases consumers could find themselves paying hundreds of pounds more per month.

Our observation is that over the last few years the financial press have been complicit in deluding the man-in-the-street about the real costs of and risks borrowing well beyond their means. Well it seems that the turkey has come home to roost. With interest rates unlikely to fall in the next year and with inflation still heading upwards, we seem to be heading for the ‘perfect storm’.

The Bank of England may later this year find itself unable to react to head off a recession starting towards the end of the year … there, we said it. More about that in a later article.

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