Earlier this month, the Bank of England’s Monetary Policy Committee voted to give the economy an additional cash injection of 75 billion pounds.

This was the second round of quantitative easing (QE) as the bank had already injected 200 billion pounds back in 2009 in an effort to increase commercial bank lending.

While answering questions on the current status of economy to a parliamentary committee, Bank of England governor Mervyn King commented on the decision to increase QE and the impact that might have on bank lending:

“I can’t guarantee that it means that bank lending will rise, but what I do believe is that it won’t fall as far as it might otherwise have done and it may start to rise now we’ll see. But I think the action will make a difference to the amount of lending, but it certainly doesn’t guarantee that lending to the real economy is positive.”

Mr. King acknowledged that Britain’s economy has been problematic and mostly stagnant for the past year and warned that it could start deteriorating again as he commented on inflation and the causes of the “very large squeeze on household income”:

“Now that’s not the result of inflation being high, inflation is the symptom. The causes of that squeeze on living standards are real causes, they are a change in real prices of energy, and utility prices of gas, electricity at home, they are the consequences of higher Value Added Tax, higher food prices, and consequence of a fall in the real exchange rate which was necessary to enable us to be able to rebalance our economy in a way that was… after quite a long period, and of relatively overvalued exchange rate.'’

Finally, when asked why the Bank of England did not increase the QE plan earlier, possibly stimulating commercial bank
lending, the governor replied that the deterioration of the Eurozone and world economy could not have been predicted earlier.

“I don’t think the scale and the immediacy of how the problem deteriorated in the euro area was obvious at the beginning of the summer”, he replied.

The bank of England approved 52,410 new mortgage loans in August, marking the highest number of mortgage approvals since December 2009.

The director-general of the Building Societies Association, Adrian Coles commented: “Approval figures continue to look promising as consumers take advantage of the competitive mortgage rates.” But he also forewarned: “However, the outlook for the economy has deteriorated over the past month as has consumer confidence, which could well spill into the housing market, causing further weakness”

The number of new mortgages approved for home buyers in August was nearly 3,000 more than in July and over than 5,000 more than the previous six-month average.

Meanwhile, the Nationwide reports that: “UK house prices changed little in September” rising by 0.1% in the month but still being 0.3% lower than one year ago.

As new mortgage approvals are expected to continue in the coming months experts believe that sales funded by mortgage loans will see an increase during autumn and this could be reflected in the coming updates to the House Price Indexes across the country.

However, according to the Bank of England’s latest credit conditions curvey (2001/Q3) a lending squeeze to households and small businesses might be imminent due to the eurozone crisis.

According to the Bank’s Q3 survey, lenders “pointed to adverse wholesale funding conditions as a key factor which might constrain future lending.” And recent discussions with some of the major lenders suggested that “although these factors had not yet led to reduced credit availability, a period of sustained tight funding conditions could act to constrain their ability to extend loans going forward.”

Between the rising number of mortgage approvals and the adverse wholesale funding conditions reported by the Bank of England there might be a relatively small window of opportunity before 2012 for households and small businesses to take advantage of an optimal mortgage loan.

A recent survey in England and Wales showed a continued decline in house prices in September as well as a nation-wide decline in the number of sales for the first time in almost a year.

House prices have been falling for 16 consecutive months and fell by 0.3% in September following a difficult August. The average British home lost £594 in value in September alone according to the latest LSL Property Services/Acadametrics House Price Index.

The Royal Institution of Chartered Surveyors (RICS) outlined a stationary housing market saying that homeowners are reluctant to sell and are pulling their home sales because of the current economic outlook might force them to drop their prices.

The seasonally adjusted house price balance calculated by RICS remained at -23 in September, one point higher than the figure expected by analysts but still indicative of a weak housing market.

The latest RICS UK Housing Market survey (11 October 2023) showed the balance for newly agreed sales falling to -4 from +2 in August and new vendor instructions also declining to -5 from -1 while new buyer enquiries rose to +3 from -2.

Members of RICS said that house prices are expected to continue their decline in the coming months while mortgage rates will remain relatively low.

Tom McClelland of RICS said houses were selling “at prices not seen for seven or eight years” and that “sellers who understand and accept where the market is are being successful and are finding buyers.”

RICS spokesman Michael Newey commented on the situation:

“Generally speaking, while it is hard to see what will give the market a lift in the near term, the announcement of a further raft of quantitative easing from the Bank of England will help to at least keep mortgage rates down. This, if nothing else, should ease the pressure on existing homeowners and limit the risk of a material pick-up in repossessions”.