Construction activity has shrunk in the second quarter as the uncertain environment has taken hold
The headlines last week featured speculation that interest rate rises would be implemented by the Bank of England in the near future. The Monetary Policy Committee (MPC) voted seven to two against raising interest rates this month but commented that “some withdrawal of monetary stimulus is likely to be appropriate over the coming months”.
While sterling jumped on the news, this increase in the value of the pound poses as many risks as benefits for the economy and, arguably, could adversely affect construction. In truth, interest rates are so low now at 0.25% that any change is only likely to edge them up to 0.5%, as they were for many years before the EU referendum.
It would hardly be uncharted waters should the MPC make the decision to raise them. For some, it will be taken as a vote of confidence in the economy that growth is sufficiently stable for interest rates to be quickly tapered higher, as is being done in the US. This would be the return of the proactive monetary policy interventions so common before the financial crisis. I, for one, think that would be a bad policy choice by the Bank of England.
It would hardly be uncharted waters should the MPC make the decision to raise them.
The economy remains remarkably fragile despite continued economic growth and falling unemployment. Wage growth, which is normally the main cause of domestic inflation, remains weak by historic standards. So it is unlikely that any rise in interest rates will have an impact on domestic inflation. Yes, higher rates will make sterling more attractive as a currency, and any increase in its value should bring imported inflation down.
However, other factors weigh on the value of sterling, so it is not clear whether any increase in interest rates would make a difference to the value of sterling. For construction, the interest rate increase has the potential to affect the housing market, which is the industry’s main growth driver. While the majority of growth is from new private housing, any general slowdown in the market has an impact on activity in new builds because of a fall in demand.
Housebuilders will therefore be looking closely at what the MPC decides over the coming months. The committee will surely have the housing market at the forefront of their minds, should they decide to raise interest rates.
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