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The week ahead 15 April 2024 - Britain’s interest rate dilemma

15 April 2024

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

Last week saw news that will complicate the Bank of England’s decision on interest rates at upcoming Monetary Policy Committee (MPC) meetings. On the one hand the latest US inflation figures came in stronger than expected, with the CPI index rising from 3.2% in February to 3.5% in March. The financial markets have now slashed their expectations on Fed rate cuts this year, and are now speculating the first cut will fall in September. The UK imports a lot of commodities, which are usually priced in US dollars; so that is a pressure on the MPC to leave rates on hold. However, on Thursday last week, the ECB (having left rates unchanged) softened its language on rate cuts, and its Chair, Christine Lagarde, dismissed the idea they should shadow the Fed on rates. The Eurozone is the UK’s largest trading partner. Our forecast is that the ECB and Bank of England are on course to deviate from the Fed and cut rates in June, as the factors shaping inflation are very different in the US compared to Europe.

Further evidence has emerged that the UK may have exited from the shallow recession seen in Q3 and Q4 2023. GDP grew by 0.1% month-on-month in February, compared to 0.3% in January (revised upwards from 0.2% previously). Although the construction sector contracted, this was outweighed by expansion in the services and production sectors. Consequently, it looks highly likely the UK will record a positive GDP figure for Q1 2024. Within services there was strong growth for the professional, scientific and technical sub-sector, and also information and communication, which bodes well for office demand. While much attention in the property industry has been focussed on rate cuts and the implications for real estate investment, it is worth remembering the strengthening GDP figures are good news for leasing markets.

This week sees data released on UK inflation and the labour market. While inflation is picking up in the US, that is to a stronger backdrop of growth than in the UK. We believe UK inflation decelerated in March, hence our forecast that the Bank of England will cut rates before the Fed. From the Euro Area, ZEW will publish its sentiment index and we are forecasting another increase.

Things to watch for this week

Tuesday, April 16th

UK Unemployment Rate, February

Previous: 3.9%
Forecast: 3.9%

As has been the case in most other advanced economies, the UK unemployment rate has not risen sharply in the face of high interest rates. We are not expecting any change in the latest figures.

ZEW Euro Area Sentiment, April

Previous: 33.5
Forecast: 34.0

Given the improving tone of recent indicators, we are predicting this survey to report confidence is gradually strengthening.

US Industrial Production, m-o-m, March

Previous: 0.1%
Forecast: 0.2%

Industrial production, having contracted in December and January, returned to growth in February. We are expecting continued growth in March given recent business surveys have had an upbeat tone.

Wednesday, April 17th

UK Inflation Rate, March

Previous: 3.4%
Forecast: 3.1%

We are forecasting inflation to slow further in March in the face of high interest rates. We believe a significant deceleration will follow in the April figures.

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