Will the Bank of England opt for a pause on Thursday?
Making sense of the latest trends in property and economics from around the globe.
3 minutes to read
Bank rescues
Banking turmoil that began two weeks ago in California continues to reverberate globally. Yesterday's takeover of Credit Suisse by UBS is a new high watermark in the crisis that complicates matters for central banks facing interest rate decisions this week.
We talked on Friday about the degree to which banks are likely to pull back on lending as they seek to shore up balance sheets. The effect may be comparable to rate hikes, leading to calls for a pause until policymakers know more. The latest came yesterday from Goldman Sachs chief executive Lloyd Blankfein.
Pricing in financial markets puts the chances of policy moves at both the Federal Reserve on Wednesday and the Bank of England on Thursday at approximately 50%. Hikes at both meetings looked highly likely just ten days ago.
Inflation expectations
The public's expectations of where inflation is headed next plays a key role in central bank decision making. If people think that prices are going to rise, they are more likely to ask for pay rises. Subsequently businesses are more likely to raise the price of goods and services, and so on.
The February Bank of England/Ipsos Inflation Attitudes Survey, published late last week, gave the BoE some breathing room. Median expectations of the rate of inflation over the coming year were 3.9%, down from 4.8% in November 2022. Expectations over the two year time-horizon fell to 3%, down from 3.4% in November. Similarly, pay growth is now easing for the first time in a year.
"To our judgement a pause seems to be the most likely outturn, although that does not necessarily imply that tightening has finished," economists at Investec said in a note to clients on Friday.
In other, related news - Prime Minister Rishi Sunak's team is pencilling in tax cuts in early-2024, should inflation fall below 3% this year.
Asking prices
The average asking price for UK homes rose 0.8% in March, paring annual growth to 3% according to figures from Rightmove. The data points "to a market on a much more stable footing than many anticipated and [is] cautiously transitioning towards the activity levels of the more normal market of 2019," the company said.
Indeed sales volumes are recovering as spring approaches, though there are sizable differences depending on property types. Sales agreed for typical first time buyer properties (two bedrooms or fewer) are recovering fastest, and in the last two weeks were just 4% behind the same period in 2019, though were 18% behind the exceptional 2022. Meanwhile, sales in the so-called 'top-of-the-ladder' sector are 10% behind the same period in 2019.
All-in-all, pretty resilient, and sales volumes at these levels will continue to put pressure on lenders to offer competitive rates:
“The pressure on rates is downwards as lenders become more competitive in a lower-volume market," Knight Frank's Tom Bill told various media late on Friday. "If central bankers adopt a less strident approach to higher rates following the collapse of Silicon Valley Bank this month, that downwards pressure will intensify. The swap market is already pricing in a more dove-ish stance after the demise of the California-based lender.”
You can read more from Tom on the outlook for UK housing in light of the Budget here.
In other news...
Investors continue to target the French residential market, writes David Bourla.