The bank of England goes for broke
Making sense of the latest trends in property and economics from around the globe.
5 minutes to read
Not desiring a recession
The Bank of England yesterday raised the base rate by 0.5bps to 5%, the highest level since October 2008.
Finessing a soft landing in which the Bank brings inflation back to target without inducing a recession seems less of a priority when you read the Monetary Policy Committee (MPC) minutes.
Ensuring there is any landing whatsoever within a reasonable timescale appears to be the plan as the Bank battles to hold onto credibility after repeatedly being wrongfooted by inflation.
"We are not expecting, we are not desiring a recession. But we will do what is necessary to bring inflation down to target." BoE Governor Andrew Bailey told Sky News.
Markets' reaction to the decision was mercifully muted. Government bond prices dipped and the pound lost 0.2% against the dollar to hit $1.27. The two-year and five-year swaps hit 5.99% and 5.26% respectively, not large moves but still levels not seen since last year's mini-budget.
Recent upside surprises
Pay growth shocked the Bank. Annual growth in private sector regular Average Weekly Earnings (AWE) rose 7.6% in the three months to April, 0.5 percentage points above the level the bank expected only a month ago.
While most measures of inflation are likely to fall over the course of the year, services CPI is projected to remain broadly unchanged in the near term. Service providers' rising costs – particularly labour costs – are being fed into consumer prices, the Bank said.
Seven members of the MPC voted for the 0.5 percentage point increase. The "significant upside news" in recent data had indicated there was more persistence in inflation against a backdrop of a tight labour market and continued resilience in demand, the MPC said.
Indeed, Gfk's closely-watched consumer confidence index, out this morning, has now risen for five consecutive months to hit a 17-month high. That resilience, but in particular "the scale of the recent upside surprises," had left the seven convinced that a bumper hike was necessary.
Interestingly, no MPC members wanted to hike 25bps and the remaining two wanted to hold. They took the view that the impacts of the energy price shock and other associated cost shocks would continue to unwind over the course of the year.
Goods price inflation would fall sharply, which would then eat into associated persistence in domestic wage and price setting, they said. Meanwhile, "sizable impacts" from past rate increases are yet to be felt, particularly those carried out in recent months. Those as-yet-unfelt hikes would more than offset any additional persistence implied by recent inflation data, they said.
The outlook for mortgage rates
Even if the two doves turn about to be right, it's going to be a tough few months for anybody looking to remortgage.
"Markets probably require two or three months of meaningful falls in core inflation before swap rates begin to ease and lenders can pass that onto borrowers via lower mortgage rates,” Simon Gammon, Managing Partner at Knight Frank Finance, told City A.M. "That means it'll likely be September at the earliest before we see any decent falls in mortgage rates and that may stretch into 2024 if inflation proves particularly stubborn. Once we do see a couple of positive numbers and swap rates begin to fall, we're confident that lenders will drop rates quickly."
The average two and five-year fixed rate mortgages stand at 5.49% and 5.17% respectively, according to Moneyfacts. That's up from 5.26% and 4.97% a month ago.
Considering developments in the rental market
Much of the focus has been on mortgage holders, but renters are also enduring sizable increases in outgoings. So much so that the MPC minutes rather vaguely said that "it had become more important to consider developments in the rental market."
Annual rental prices in the UK rose 5% in May, the highest rate for seven years, according to official figures published this week. London led the rise, with a 5.1% gain.
"Rents continue to be forced higher by a lack of supply, which has been exacerbated by a number of landlords selling up in recent years," said Knight Frank's head of UK residential research Tom Bill. "A series of tax changes have been politically expedient but economically damaging, with tenants paying the price as a growing number of property owners decide being a landlord no longer stacks up. Rising rates will only exacerbate this situation this year, and upwards pressure on rents is unlikely to relent any time soon.”
Fast tracking
During this week's edition of the Intelligence Talks podcast, Anna Ward was joined by head of London research Shabab Qadar and our head of planning Stuart Baillie to discuss how developers are grappling with obsolescence risk. Around 7m sq ft of institutional grade office leases in London are at risk under the government's proposed minimum energy efficiency standards (MEES).
Not everything can be upgraded, so developers will have to find new ways to save assets from becoming stranded. The City of London is planning to fast-track applications to convert unused older offices for new purposes such as hotels, according to a report in this morning's FT.
Some 80% of city of London offices are considered prime, Shravan Joshi, chair of the City’s planning and transportation committee told the paper. “It’s that 20 per cent that we have really got to manage, and make sure they don’t become stranded assets," he added.
In other news...
John Lewis flat-building plans hit by affordability rules (Times).