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The week ahead 25 September 2023 - Has the UK base rate peaked?

25 September 2023

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

The Bank of England last week voted by a 5-4 majority to leave the UK base rate unchanged at 5.25% - defying expectations of a 25 bps rise. A few weeks ago, the Bank of England’s Chief Economist, Huw Pill, gave a speech where he likened his preferred trajectory for UK interest rates to Cape Town’s flat-topped Table Mountain. Mr Pill favours leaving the base rate unchanged at 5.25% for an extended period of time. So, have we reached the peak for UK interest rates? Certainly, the surprise decline for UK inflation has taken pressure off the Bank of England. CPI inflation edged down from 6.8% in July to 6.7% in August, compared to forecasts of a rise to 7.0%. Also, the PMI figures were disappointing, with the indexing dropping to 46.8 in September, down from 48.6 in August, which points to a cooling economy. All this makes another rate hike appear less likely unless there were a sudden change in the data.

The UK retail sector received some upbeat news as figures from ONS showed sales volumes increased by 0.4% in August, following a fall of -1.1% in July. However, the statistical office pointed out that poor weather had impacted the July figures, so some of the increase in August was probably delayed spending from the previous month. In most advanced economies the consumer mood is difficult to call at the moment. Mostly, the data points to frugality in the face of rising interest rates. However, there is also talk of a ‘Beyonce’ or ‘Taylor Swift’ effect whereby the public are prepared to take a break from economising and make big purchases when something is perceived to be exceptional (such as expensive concert tickets for a favourite act). So, presently spending is at the extremes, i.e. essentials or special occasions.

This week sees the release of the Nationwide House Price Index for September, and we are expecting prices to fall again in the face of higher mortgage rates and ongoing affordability issues. The Eurozone will release its early ‘flash’ inflation figure, and we believe this will show a further decline as higher interest rates take effect.

Things to watch for this week

Friday September 29th

Euro Area HICP ‘flash’ Inflation, September

Previous: 5.2%
Forecast: 4.9%

We are forecasting a deceleration for September as energy continues to exert downwards pressure on the index, and high interest rates slow demand. We also expect core inflation to decline, which will ease pressure on the ECB to hike.

Nationwide House Price Index, y-on-y, September

Previous: -5.2%
Forecast: -5.2%

Mortgage rates improved slightly but are still high and hence demand remains very weak. Supply deteriorated according to the RICS survey, which may provide some counterbalance and support to pricing. Overall, we think the index will fall by a similar amount as the previous month.

US Personal Spending, m-on-m, August

Previous: 0.8%
Forecast: 0.5%

July saw a slight increase in US spending growth, despite recent interest rate hikes. Thanks to low unemployment and continued pay growth, we are predicting another increase, which bodes well for consumer-facing real estate like shops and restaurants.

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