The week ahead 07 August 2023 - Bank of England rate rises to 5.25%
What to watch out for in the UK economy and property market this week.
Last week saw the Bank of England follow suit on the US Federal Reserve and the ECB, with a 25 bps interest rate hike that took the base rate to 5.25%. That two Monetary Policy Committee (MPC) members favoured a 50 bps increase has stoked expectations that another 25 bps will be added at the next rate setting meeting in September. The MPC also indicated that it would hold rates at a higher level for long enough to get inflation back to the 2.0% target. Interestingly, the financial markets appeared to signal that they now expect the base rate to peak at a lower level than they had previously been pricing for. Six-month Gilt yields fell to 5.57% on Thursday compared to 5.76% just a week earlier, while the swaps market is pricing an interest rate peak of around 5.65%, down from 6.5% nearly a month ago.
The fall for UK inflation in June seems to have reassured the debt markets. A new consensus is emerging of the base rate potentially peaking at 5.50% in September; but with the possibility of a further rise to 5.75% in November not entirely ruled out. This is mixed (but leaning towards favourable) news for property. A further rise in interest rates will heap pressure to sell on those who find assets uneconomic when their existing debt needs refinancing, although the subsequent sales will accelerate the repricing process and draw opportunist investors off the side lines. Also, growing confidence that the base rate probably won’t rise as high as previously feared, should encourage more lending and at better rates. This has already started to happen in the home mortgages market, with lenders cutting rates on new deals.
This week sees industrial production figures for Germany which we believe will show a further contraction in output occurred in June, as exporters struggled with a slowdown in global trade. The UK reports GDP growth figures for Q2 on Friday, following the better-than-expected Eurozone GDP figure of 0.3% q-on-q last week (the consensus forecast was 0.2%). Due to the high number of strikes in Q2 and the impact of rising interest rates, we are forecasting a positive but subdued Q2 figure for the UK of 0.1%.
Things to watch for this week
Monday 7th August
Germany Industrial Production, m-on-m, June
Previous: -0.2%
Forecast: -0.3%
We believe a slowdown in the global trade and a sluggish domestic economy will have further dampened factory output in Germany in June.
Thursday 10th August
US CPI inflation, July
Previous: 3.0%
Forecast: 2.8%
With much of the energy spike now out of the CPI index, we expect headline inflation to fall, although the Fed will be monitoring core and services inflation for any upside surprises.
Friday 11th August
UK GDP growth, q-on-q, Q2 2023
Previous: 0.1%
Forecast: 0.1%
Rising interest rates and a number of major strikes between March and June lead us to forecast subdued growth in Q2.
