The week ahead 30 January 2023 - Central banks poised to hike again
What to watch out for in the UK economy and property market this week.
This week sees interest rate decisions from the Fed, ECB and the Bank of England (BoE). All three are widely expected to up rates, although we expect the increases to be in the 25-50 bps range, as they continue to dial down the size of the rises. Bank of Canada hiked by 25 bps last week. Given the weak macro-economic data, BoE may well be announcing its last hike of this interest rate cycle. After all, the labour market figures are now showing a deceleration, and the poor retail sales data for December points to an embattled consumer. The ECB has been hawkish in their guidance lately, and we expect two more hikes (including this week’s) before they pause, mindful that a recession in 2023 remains a possibility; even if the likelihood has reduced. This feels like we are drawing close to the end of policy tightening.
For property markets, this offers firms the certainty to plan ahead in 2023, indeed market interest rates have declined during January. The UK 5-yr swap rate stood at 3.89% last Thursday, having finished December at 4.33%. Swaps have seen comparable declines in the Euro Area and North America. Since starting to correct in the middle of last year, UK all property capital values have fallen by 20% on the MSCI/IPD measure. The January figures will probably show a further decline. With the debt market stabilising and property values having fallen substantially, many investors may decide it is time to begin the due diligence process to be ready to buy at the right moment. We see the investment market this cycle as matching the weather - it’s definitely winter and the cold season has further to run, but spring is coming.
As well as the central bank meetings, this week sees the release of GDP numbers from the Euro Area. Lately data from the currency bloc’s member states has been slightly better than expected. For instance, Spain last week reported Q4 GDP grew by 0.2%, exceeding forecasts of 0.1%. Until recently many analysts were expecting a small contraction for Eurozone GDP in Q4, although a zero growth figure is now looking more likely.
Things to watch for this week
Tuesday 31st January
Euro Area ‘flash’ GDP, Q4 2022
Previous: 0.3%
Forecast: 0.0%
The PMI data in the final months of 2022 pointed to a contraction in Eurozone business activity, however better than expected recent data suggests GDP may have stagnated rather than shrank.
Wednesday 1st February
Fed Funds Rate, February
Previous: 4.5%
Forecast: 4.75%
Last week’s US GDP figures were stronger than expected, which will give the Fed the confidence to hike, albeit by a more restrained 25 bps.
Thursday 2nd February
Bank of England Base Rate, February
Previous: 3.5%
Forecast: 4.0%
With inflation still in double digits and GDP better-than-expected for November, we see the Bank announcing an increase of 50 bps. We suspect that they will then move to a ‘wait-and-see’ position to assess the impact of recent hikes on the wider economy.
