interest rates

Interest rates are expected to increase this week for the third time in three months as the Bank of England tries to curb a rapid rise in the cost of living.

A hike to 0.75% from 0.5% is anticipated, which would return us to the level of March 2020 but comes against the backdrop of geopolitical volatility and the likelihood that inflation will exceed 7%.

Rising gas and electricity costs are the main factors pushing up prices across the economy.

Inflation, as measured by the consumer prices index (CPI), is expected to peak at 7.25% in April, and average close to 6% in 2022.

Despite inflationary pressures, demand for property remains strong.

The latest figures show that the number of new prospective buyers in the UK was 47% higher than the five-year average in the first week of March. The figure for the first nine weeks of the year was up by 54%.

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Meanwhile, the number of offers accepted was up by 81% in the first week of March, having risen 50% over the first nine weeks of the year.

Much-needed housing supply is also showing signs of picking up, with the number of market valuation appraisals 11.3% higher in the first nine weeks of the year. Sales instructions are catching up but were down by 6.3% over the same period.

Why is the market so active despite the current economic and political backdrop?

Tom Bill, head of UK residential research at Knight Frank explained: “The first reason is easily overlooked – the end of the pandemic. The lifting of final restrictions and return to normality is spurring people to take decisions about how and where they live. Crucially, it means demand is more needs-driven and less susceptible to external events.

“In higher-value property markets, larger bonuses in sectors including financial services and law have also provided some insulation against the spiralling cost of living.”

But growth is not limited to a narrow group of professions, according to Savvas Savouri, chief economist at Toscafund.

He believes challenger banks will drive competition in the mortgage market and put downwards pressure on rates in the same way Aldi and Lidl did in the supermarket sector.

Savouri commented: “Households are sitting on £250bn of excess savings compared to the start of the pandemic. House price growth has also created an extra £1trn in housing equity over the last two years.”

He expects the Bank of England base rate to end the year at 1.25% or 1.5% as the current uncertainty leads to a slightly shallower upwards trajectory. However, he remains bullish in his outlook for the UK economy this year.

“For a recession, you need the labour market or the banking system to collapse and we are nowhere near either,” he added.

Knight Frank expect house price growth to return to single-digits as supply continues to pick up and rates normalise, but the estate agency says that it seems unlikely it will get anywhere close to zero.

By MARC DA SILVA

Source: Property Industry Eye

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Facing pressure to curb surging inflation, the Bank of England looks set to raise interest rates again on Thursday and signal further unwinding of its pandemic stimulus, including a gradual reversal of its huge bond-buying plan.

Twenty-nine of 45 economists polled by Reuters late last month said the BoE would raise Bank Rate to 0.5% from 0.25% at its February meeting, hot on the heels of December’s rate hike, the first by a major central bank since the pandemic.

It would mark the first back-to-back borrowing cost increases by the BoE since 2004, reflecting an urgent need to show it is on top of an inflationary surge.

Separately, British finance minister Rishi Sunak was expected to announce on Thursday measures to smooth a possible 50% jump in household energy bills. read more

The Bank of England forecast in December that inflation would peak at around 6% in April but price growth that month jumped by more than expected to 5.4%, its highest in almost 30 years.

The labour market has also tightened, something Governor Andrew Bailey says is key to the monetary policy outlook.

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Data published on Thursday showed employers were offering higher pay deals in the face of staff shortages and rising inflation. read more

“Members are likely to disregard what looks set to be a temporary bump in the path of the economic recovery around the turn of the year due to the spread of the Omicron variant,” said Investec chief economist Philip Shaw, predicting an unanimous 9-0 vote by the Monetary Policy Committee to raise rates.

The BoE’s stance contrasts with the European Central Bank, which looks set to leave policy on hold on Thursday. read more

The U.S. Federal Reserve is signalling a first rate hike in March although officials spoke cautiously on Monday about what might follow. read more

Investors will be looking for signs in the Bank of England’s new inflation forecasts whether it thinks investors are being too aggressive by betting on the Bank Rate reaching 1.5% by the end of 2022.

But Bailey may be wary about sending explicit messages after the BoE wrong-footed many investors last year.

Among MPC members, only Catherine Mann, Bailey and Deputy Governor Jon Cunliffe have spoken publicly in 2022.

“After the BoE’s communications fiasco late last year, it has decided to respond by saying less rather than more,” said JPMorgan economist Allan Monks, cautioning that investors’ conviction about a 25 basis point hike might be overdone.

The announcement is due at 1200 GMT. Bailey will lead a news conference half an hour later.

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LITTLE QT

If rates do go up to 0.5%, it marks the point at which the BoE has said it will begin a process called quantitative tightening (QT) – or reducing its vast holdings of government bonds, bought to stimulate Britain’s economy.

The Bank of England has said it will start by not reinvesting money from maturing gilts, possibly as soon as March when 25 billion pounds of bonds it owns are due to mature.

Bond investors want to know if the BoE intends to accelerate the QT process.

Last August, it said it would start to sell its gilts once Bank Rate hits at least 1%, depending on economic circumstances.

“Even though the market is actively pricing such a scenario, we continue to doubt that the hiking cycle will get that far,” said Rabobank strategist Stefan Koopman, who warned the BoE might find itself raising rates just as the economy slows.

Tax hikes on workers, as well as rising energy and food bills, are set to intensify a cost-of-living squeeze.

A survey from insurance and pensions company Aegon showed 38% of Britons were worried that rising interest rates would hit their finances. An Ipsos MORI poll for the Evening Standard newspaper showed economic morale at a one-year low.

By Andy Bruce

Source: UK Reuters

The Bank of England will plough ahead and hike interest rates for the first time three years this month despite concerns the Omicron variant could whack the UK economy, according to City analysts.

Strong booster jab take up and high levels of existing immunity stemming from the successful vaccination programme has put the British economy in a strong position to withstand a fourth wave of coronavirus triggered by the new variant, experts at Goldman Sachs have predicted.

The emergence of the heavily mutated strain of coronavirus last week initially sparked fears over the health of the British economy due to the likelihood of strict restrictions to curb the spread of the disease.

These downbeat assessments cast doubt over whether the Bank would raise interest rates at its next meeting on December 16.

However, under Goldman’s baseline scenario, “the UK economy will hold up relatively well during the fourth wave, given high vaccine take-up and a successful booster programme,” the Wall Street investment banking giant said.

“As a result, we still believe that a 15 basis points BoE hike is more likely than not at the December meeting.”

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Bullish assessments from global health leaders have emerged this week downplaying the severity of the Omicron, potentially pushing members of the Old Lady’s rate setting committee into lifting rates.

The World Health Organisation (WHO) tempered speculation that the existing crop of Covid-19 vaccines could be scuppered by the new variant by signaling there is no evidence the new strain reduces their efficacy.

GlaxoSmithKline also announced today its Covid-19 antiviral treatment is effective against Omicron.

Those upbeat health assessments have been echoed by economists this week, who have stressed the UK economy is in a much better position to function effectively even amid Covid-19 curbs.

A waning impact of the virus on the economy suggests it will be able to stand on its own two feet without ultra-loose monetary policy, paving the way for a rate hike.

Even before the emergence of the variant, the Bank was under intense pressure to hike rates to hose down runaway inflation.

The Old Lady stunned markets last month when it left rates unchanged at a record low 0.1 per cent despite expecting inflation to hit five per cent next spring.

Prices are already 4.2 per cent higher than they were a year ago, the highest rate of increase in nearly a decade, according to the Office for National Statistics.

Goldman also expects the Bank of England to hike again in May next year, taking rates to 0.75 per cent by the end of 2022.

By JACK BARNETT

Source: City AM

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