The week ahead 19 June 2023 - The Bank of England prepares to hike

What to watch out for in the UK economy and property market this week.

The ECB announced a widely expected 25 bps rate hike last week and signalled to markets that another was in the pipeline. Across the Atlantic, the Fed chose to pause interest rate rises, in part because a tightening of lending standards recently provided much the same effect by reducing the flow of debt. This week the Bank of England’s Monetary Policy Committee meets. A base rate increase looks a near certainty, probably with more to come. We see the UK base rate reaching at least 5.25%, perhaps 5.50%. Overall, it appears we are now in phase two of the fight to bring down inflation, and this means the prospects for growth have just got darker in the second half of the year; although we expect low growth in H2, not a technical recession.

The big property news last week was the release of the UK MSCI monthly commercial property index. This showed the brief rise in capital growth at the ‘all property’ level in March and April had ground to a halt in May. On rounding the month-on-month growth rate was zero, but at two decimal places it was slightly negative at -0.03%. Offices and shopping centres sank deeper into the red. Industrial and retail warehouses continued to grow but at a slower pace. The slowdown was probably due to the dramatic shift we have seen in expectations on interest rates, which has pushed the one-year swap rate from 4.7% on 3rd April to 5.8% last Thursday. With debt becoming more expensive, we see the MSCI all property capital growth index reporting a moderate fall in the coming months. Nevertheless, the resilience in the retail warehouse and industrial markets is encouraging.

As well as the already mentioned Bank of England rate decision, this week sees inflation data for the UK. Much of the base effect from falling energy prices has now dropped out the index, so we are anticipating just a small decline in the rate of inflation. Also, most major economies will see ‘flash’ PMI data released. Our expectation is the various national composite indices will largely point to continued growth at levels not much different to that reported for May.

Things to watch for this week

Wednesday 21st June

UK Inflation Rate, May

Previous: 8.7%
Forecast: 8.5%

Thanks to the energy base effect dropping out the index, we are anticipating another fall in headline inflation, albeit a small one due to sticky core and services inflation.

Thursday 22nd June

Bank of England Rate Decision, June

Previous: 4.5%
Forecast: 4.75%

A 25 bps hike is looking a near certainty for this week’s meeting, and we are forecasting more to follow as the Bank acts to bring down core inflation.

Friday 23rd June

Eurozone ‘flash’ Composite PMI, June

Previous: 52.8
Forecast: 52.8

With inflation slowly decelerating but interest rates rising, we believe little has changed in the business environment between May and June. This should result in a broadly similar reading.