The week ahead 04 September 2023 - The debate intensifies on interest rates

What to watch out for in the UK economy and property market this week.

The debate on when interest rates will peak intensified last week following disappointing inflation data from the Euro Area and a surprising speech from the Bank of England’s Chief Economist. The preliminary August HICP inflation figure for the Euro area was unchanged at 5.3%, compared to a consensus forecast of 5.1%; although core inflation edged down to 5.3% from 5.5% previously. The figures also showed growing disparity among key economies, with Germany at 6.4% but Spain at 2.6% (and rising). Consequently, it is looking like a close call whether the ECB does hike at its next meeting. In contrast, the Bank of England’s Chief Economist, Huw Pill, gave a speech in South Africa where he compared his preferred path for rates to Cape Town’s flat-topped Table Mountain. Mr Pill, who up to now has voted for rate hikes, is now leaning towards leaving the UK base rate unchanged at 5.25% for a protracted length of time.

Overall, the summer has been a period of uncertainty on interest rates, which is not a supportive environment for property. Indeed, the August UK house price figures from Nationwide showed a fall of -5.3% y-on-y and -0.8% m-on-m. Separate data from the Bank of England reported a drop in mortgage approvals in July. This is a concern as the summer saw many lenders cut mortgage rates, but clearly this was not enough to entice buyers back into the market. More certainty is needed on the outlook for interest rates, which we may get at the next ECB and Bank of England meetings later this month. However, our current outlook is for UK house prices to continue to fall until next summer, but at a more subdued pace than reported in the August Nationwide figures.

This week sees so-called ‘factory gate’ inflation figures from the Euro Area with the release of the Producer Price Index data. This volatile inflation measure turned negative in May and June, and we are forecasting another decline for July. This could result in lower prices for finished goods in the shops further down the line. Also, figures from the British Retail Consortium (BRC) should give some clues as to the strength of the high street in August.

Things to watch for this week

Tuesday 5th September

UK BRC Retail Sales y-on-y, August

Previous: 1.8%
Forecast: 0.3%

We see growth decelerating in August, as the impact of further interest rate hikes continue to bite on household incomes. Also, the relatively cool August weather probably reduced impulse spending.

Euro Area PPI Inflation y-on-y, July

Previous: -3.4%
Forecast: -7.8%

We are forecasting ‘factory gate’ inflation to be negative for a third consecutive month on lower energy and commodity prices.

Thursday 7th September

Germany Industrial Production m-on-m, July

Previous: -1.5%
Forecast: -0.4%

We believe a generally difficult environment for German exports, and weaker domestic demand, resulted in another month of contraction for the industrial sector in July.