Nickell Sees U.K. Rate on Hold as Loan Market Nears `Famine'

By Svenja O'Donnell

July 2 (Bloomberg) -- Former Bank of England policy maker Stephen Nickell said the central bank should avoid raising interest rates to curb inflation as the mortgage market edges close to ``a famine'' and wages stay under control.

``There isn't a great deal of evidence out there that workers are able to push for compensation for higher living costs,'' said Nickell, who is chairman of the U.K. government's National Housing and Planning Advice Unit. ``Keeping rates on hold would be the order of the day.''

Mortgage approvals fell to the lowest level in at least nine years in May and home values dropped the most in June since 1992, bringing the nation closer to a recession. Crude oil rose to a record high this week, stoking inflation and leaving policy makers to consider whether they can risk raising interest rates to contain consumer prices.

``In the mortgage market, it's almost a famine,'' Nickell said in an interview yesterday. ``I'm very pessimistic at the moment. In the end, because of the lack of trust, unless there's some kind of kite-marking and guarantee system so that mortgages can be used as collateral by the lenders, then I'm very gloomy.''

While Bank of England Governor Mervyn King predicts the U.K. economy may contract, accelerating inflation led policy makers including John Gieve, Paul Tucker, Timothy Besley, and Kate Barker to consider raising the rate in June from the current 5 percent.

Inflation Pressure

``I don't necessarily see a recession,'' said Nickell, who was a U.K. rate-setter from 2000 to 2006. ``The difficulty is the inflationary pressures from food and oil which are also having an effect on the economy.''

The crude oil price reached a record above $143 a barrel this week, while corn, wheat and rice prices have all risen to records this year. The inflation rate jumped to 3.3 percent in May, the highest in at least 11 years.

``The more anxious they are about oil prices going on rising and the wage implications of that, the more likely they ought to think about raising rates,'' Nickell said. ``If they feel relatively comfortable about that, they'll go on hold.''

Wage pressures have shown little sign of intensifying, apart from an agreement with tanker drivers at subcontractors for Royal Dutch Shell Plc, Nickell said. The Unite Union representing them sought a 13.2 percent pay increase. Average wages, excluding bonuses, rose an annual 3.9 percent in the quarter through May.

Rate Meeting

The bank will keep the main rate unchanged on July 10, the median of 30 forecasts in a Bloomberg survey of economists shows.

Britain's banks are reining in lending following the collapse of the U.S. subprime mortgage market, which has cost financial institutions worldwide $400 billion in losses and writedowns.

``If the financial markets return to normal, then house prices relative to incomes would just go back up again,'' Nickell said. ``The fundamental fact that houses are being built much more slowly than the creation of households, and they're getting wealthier, just suggests that house prices will start rising again,'' he said.

House prices fell 6.3 percent in June from a year earlier, Nationwide Building Society said yesterday. All things being equal, prices rise about 2 percent if the number of households climbs 1 percent, research by the NHPAU, a panel formed a year ago to advise the government on homebuilding, showed today.

Banks have starved the housing market of mortgages, which dropped to 42,000 in May, the lowest on record. The cost of a home loan fixed for two years with a 25 percent deposit rose to 6.27 percent last month, the highest since 2000. Nickell said the squeeze is preventing people from entering the property market.

``First-time buyers have got to come in, so without them that really undermines the housing market,'' Nickell said. ``It would be around 2015 that house prices got back onto the track that they would have been on had we not had the credit crunch.''

Britons' ability to afford homes won't improve even if house prices drop 5 percent this year and 10 percent in 2009, the NHPAU's research shows.

``This is a financial market recession arising from a lack of trust among financial-market participants,'' Nickell said. ``The demonstration of that is how difficult it is for a first-time buyer to get a mortgage. We're talking about people with good income prospects, secure jobs, who are finding it very hard.''

To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net.
Last Updated: July 1, 2008 19:00 EDT