The week ahead 12 June 2023 - Canada leads the way on rate hikes
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What to watch out for in the UK economy and property market this week.
Last week saw the Bank of Canada, which just a few weeks ago was assumed to have reached the end of its hiking cycle, surprise the markets and hike interest rates by 25 bps, responding to sticky core inflation and a rebound in the housing market. The Reserve Bank of Australia (RBA) also opted for an unexpected 25 bps increase in its policy rate, pointing out that “expectations of ongoing high inflation contribute to larger increases in both prices and wages”. The RBA neatly summarised the concerns held by the major central banks: that a higher level of inflation could become embedded as both firms and workers lift their prices and pay demands to match current levels of inflation. Tight labour markets have fuelled this fear among policymakers. Separately, it was announced the Euro Area experienced a mild recession in Q4 2022 and Q1 2023.
This week both the ECB and the Fed will hold their policy meetings, with the ECB expected to hike interest rates by 25 bps. We believe the Fed may do the same, although there is some debate on whether they might hold fire. The Bank of England meets next week, and we suspect a 25 bps rise is coming for Britain. A concern from a property perspective is this will create uncertainty in the debt markets. Just a few weeks ago most believed UK interest rates were either at or close to their peak; now many expect the base rate to increase by another 75-100 bps. As well as pushing up the cost of debt, this is also likely to persuade buyers thinking of re-entering the property investment market to hold fire until there is greater certainty. Note that in the last three weeks, the UK one-year swap rate has risen from around 5.0% to 5.5%.
As well as the central bank policy meetings, this week sees labour market and GDP figures for the UK. On the labour market, recent months have seen falling job vacancies and a slightly rising unemployment rate; but also high nominal pay growth. The Bank of England will be looking to see if wage increases are starting to moderate. The GDP figures will be for April, which saw less strike action so is likely to see a return to growth after the contraction reported for March.
Things to watch for this week
Tuesday 13th June
UK Unemployment Rate, April
Previous: 3.9%
Forecast: 4.0%
In the face of rising interest rates and general economic uncertainty, we believe the unemployment rate will increase slightly.
Eurozone ZEW Sentiment Index, June
Previous: -9.4
Forecast: -11.0
Given the Euro Area’s recent slide into a mild recession and expectations that interest rates have further to rise, we are anticipating another negative figure.
Wednesday 14th June
UK GDP Growth, April
Previous: -0.3%
Forecast: 0.2%
Month-on-month, UK GDP growth has been volatile lately due to frequent strike action. We are expecting a positive figure for April.
US Fed Rate Decision, June
Previous: 5.00-5.25%
Forecast: 5.25-5.50%
Our view is that the Fed will respond to recent stronger than expected labour market figures with a 25 bps hike.
Thursday 15th June
ECB Rate Decision, June
Previous: 3.75%
Forecast: 4.00%
The ECB has strongly hinted another increase is coming, with a 25 bps hike generally expected.
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