The first full week post-General Election has painted a rosy picture: the UK economy grew by a better-than-expected 0.4% in May, the Pound hit a one-year high, the FTSE 100 ended Friday in the green, and the property market showed resilience despite hawkish comments from Bank of England Chief Economist, Huw Pill.
In his speech to the Asia House think tank on Wednesday, Pill welcomed the news that headline inflation hit the 2% target in May but stressed: “It is not enough to meet the target in a transitory or fleeting way. Rather the MPC must achieve the inflation target on a lasting and sustainable basis.”
He further added: “The difficulty in extracting signals about changes in the low frequency persistent component of inflation from noisy higher frequency indicators has not disappeared. Nor is it likely to in the coming months.” Anyone understand this?
The audience might have been baffled by his jargon, as I am also, but traders got the message, and the financial markets, which had been betting 60-40 in favour of a rate cut, immediately adjusted the odds to 50/50.
Yet, there’s still hope for a base rate cut since early 2020. Wage growth, the main driver for services inflation, is expected to cool further next week.
Mortgage Rate Cuts Continue
Cooler wage growth may be why lenders are viewing things differently from the markets. Over the week, mortgage rates have continued to drop, with major players like Nationwide, Halifax, and Barclays reducing fixed rates. Perhaps the most telling sign came from Virgin and Clydesdale Bank, who announced a 0.25% reduction to their Standard Variable Rates on Thursday. It’s rare for lenders to tweak their SVRs without an official base rate adjustment, hinting they believe one is imminent.
Even Surveyors Upbeat
It’s been a positive week for the property market when even surveyors are optimistic. The Royal Institution of Chartered Surveyors (RICS) reported that over the next three months, a net balance of +20 survey respondents anticipate a recovery in residential sales, up from +10 in June and the highest level since January 2022.
Tarrant Parsons, RICS Senior Economist, noted: “There are some factors emerging now that could support a recovery in the months ahead. If the Bank of England deems the inflation backdrop benign enough to start loosening monetary policy next month, this could prompt further softening in lending rates.”
Even if the Bank of England doesn’t lower the base rate next month, historical analysis by Newspage indicates that mortgage approvals tend to rise by 4.4% on average in the three months following a General Election compared to the three months before. This suggests that demand for property should rise between now and September, supporting house prices.
Positive News Across the Pond
Looking ahead, next week’s UK inflation data will be crucial in shaping the Monetary Policy Committee’s decision on August 1st. Current consensus estimates see headline inflation remaining sticky at 2%, with core inflation at 3.5%. While this suggests a rate cut hangs in the balance, a CPI print below estimates could reignite hopes for a cut in the coming weeks.
Even if we face a nightmare on Threadneedle Street in August with the MPC erring on caution, borrowers and the UK property market might find relief from events 3.5 thousand miles away. US inflation cooled to 3% in June from 3.3% in May, mainly due to lower petrol prices. Markets believe this could prompt the US Federal Reserve to cut interest rates as early as September, and historically, the UK often follows the US lead on rate policy.
In summary, while the Bank of England’s cautious stance might stir unease, a combination of domestic and international factors suggests a positive outlook for borrowers and the property market in the coming months.
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