Mountain high, valley low? What’s next for interest rates?
Discover key economic and financial metrics, and what to look out for in the week ahead.
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WHAT’S NEXT FOR INTEREST RATES?
In a move that surprised money markets and economists, the Bank of England (BoE) voted to keep its interest rate steady at 5.25% last week, ending a run of 14 consecutive rate hikes. This was largely in response to UK inflation falling to 6.7% in August, from 6.8% in July and below the BoE’s forecast of a 0.3ppts rise to 7.1%.
Economists widely expect that September’s interest rate hike was the last of the BoE’s tightening cycle, however, market pricing currently indicates a 75% chance that rates will rise again. The BoE aims to lower inflation while achieving a soft landing. The last three recessions in the UK were preceded by interest rate rises over 12 months prior.
Overall, last week’s decision has been taken as a positive for UK CRE. Sterling has fallen almost 3.5% vs. the dollar over the month, making inbound investment cheaper. Meanwhile, some equity analysts believe a plateau in rates could be sufficient to drive renewed investor interest in UK REITs.
WHERE WILL DEBT COSTS BITE HARDEST?
What impact is the current level of interest rates having on businesses? The latest ONS Business Insights and Conditions survey of c.10,000 UK companies revealed that only about half had any debt at all. Of the rest, however, only 24% had a high level of confidence when it came to being able to meet their debt obligations. Interestingly, respondents from two sectors currently in the spotlight - construction and manufacturing - were actually more positive about meeting their debt obligations, compared to the wider economy, with 30% and 29% of businesses highly confident their businesses could meet their debt obligations, respectively.
CLIMATE POLICY U-TURN
Rishi Sunak has outlined a “new approach” to UK climate policy, including scrapping plans to enforce minimum EPC ratings on residential properties. Some have questioned whether a similar approach may be applied to commercial real estate. Our view is that both users of and investors in UK CRE are already focused on assets that adhere to high ESG standards, and altering EPC targets would not significantly change that. Our recent ESG Property Investor Survey found that 76% of respondents aim to improve the efficiency of their existing properties and 61% require an EPC Plus or pathway report before an acquisition.
If they succeed at the next general election, which some commentators expect to occur earlier than previously anticipated, Labour plans to invest £28bn per year on climate change measures. Climate policy will remain a sticking point for both parties in the run-up to the election, and during the upcoming party conferences.
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