Interest rate tensions

Speculation was in the air again this week. This time it was not about takeovers so much as interest rates. There was a sense that they were going to fall a quarter of a percentage point in July, and, if not, in August. The rumours, doing the rounds a week before the Bank of England’s monetary policy committee was due to meet on Wednesday, sent shares in the construction and materials sector up 2.6% to 3669.

In the UK it has long been believed that housebuilders’ shares are linked to movements in interest rates, resulting in knee-jerk reactions from the market. (Interestingly this is in contrast to the US market, where rising interest rates have accompanied hikes in housebuilders’ share prices.)

The gut feeling of the market last week may not be unfounded. The last time the MPC met in June two members voted for a cut. Since then, their case has been strengthened by lowered consumer confidence. Housebuilders such as Wilson Bowden, Westbury and Fairbriar have also made a number of downbeat trading statements and painted a slightly sombre picture of the market.

Sales data from the British Retail Consortium is this week expected to reveal a further slowdown in consumer spending. The BRC has been appealing to the MPC to cut rates for the past six months, and has brought forward its June survey to emphasise the urgent nature of the situation. The CBI has also joined the campaign with calls for a reduction.

Such is the power of a prospective rate cut that shares in the construction sector have done well, despite warnings from companies including Crest Nicholson that the market would remain “challenging”. Crest’s share price remained unchanged at 284p, but other housebuilders, even those with a more downbeat outlook, rose.

Shares in Wilson Bowden rose 1.8% to 1180. Redrow had the biggest increase, up 7% to 428p, partly helped by upbeat claims for the year to the end of June. It was closely followed by Persimmon (+5.7%), Bellway (+5.1%) and Taylor Woodrow (+5%).

Among the contractors, Carillion was the biggest gainer, up 5.6% to 284p. Costain bucked the trend by falling 4.2% to 51.5p.

The all-share index rose 1.6% to 2584.