Four lenders notch up mortgage rates
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
The US inflation story is diverging from Europe's - what does that mean for UK borrowing costs?
America's economy is booming, and it's not clear that the Federal Reserve will opt to cut interest rates at all this year. By contrast, inflation in the Eurozone is running close to target and the European Central Bank looks on track to begin easing in June.
Whether the UK is more closely aligned with Europe or the US is the most important question for real estate values in the medium term. The answer, unfortunately, is anybody's guess.
Divided views on the divide
Investors and economists disagree, for starters.
As Antonia Haralambous pointed out in yesterday's Leading Indicators, money markets expect the BoE's interest rate path to be closely aligned with the US. Since January, market expectations have moderated from six rate cuts to just two, with the first arriving in August. Economists, meanwhile, still widely expect the BoE’s first 25bps rate cut in June, and reckon the base rate will fall to 4.25% by year-end.
There appears to be a growing split within the BoE's Monetary Policy Committee, too. Bank of England chief economist Huw Pill said yesterday that interest rate cuts remained some way off, but other members have given different signals. Deputy governor Dave Ramsden said on Friday that the risk of persistent UK inflation had receded and prices are likely to rise at the Bank's 2% target for three years. Governor Andrew Bailey issued similar sentiments at the IMF earlier this month.
The answer will have huge implications for everything from borrowing costs to foreign exchange. Investors are increasing bets that the euro will fall to parity with the dollar, for example. Bank of America says markets are now pricing in a more than 10% chance of such a scenario within the next six months.
Price pressures
For those of us hoping for European alignment, yesterday's Purchasing Managers Index offered little comfort. Input price inflation, or companies' costs, accelerated sharply during April and overall cost pressures were the strongest in nearly a year.
The rate of cost inflation in the service sector - a particularly cause of concern among BoE policymakers - was the steepest since last July, which was almost exclusively linked to higher salary payments. This is at least partly down to a near 10% annual increase in the National Living Wage and the resulting impact on pay awards to other employees.
That said, there are signs that companies are having difficulty passing these costs through to consumers. The rate of inflation when it comes to prices charged eased across the private sector - that metric for the services sector climbed at the slowest rate since February 2021.
Meanwhile, the economy continues to show resilience despite the cloudy outlook for interest rates. Private sector activity expanded for the sixth consecutive month. The rate of growth in the services sector was the fastest in nearly a year.
The housing market
Mortgage market volatility has put a dent in the recovery, but only to a point. I looked at Rightmove data on Monday showing asking prices, new sellers and new sales all continue to rise.
The market is set for another test. Barclays, HSBC, NatWest and Leeds Building Society all notched up mortgage rates yesterday, according to the Times. A few others are likely to follow suit. Any increases "are likely to be relatively small for the time being and should be followed by a period of stability until cuts to the base rate come into view,” Simon Gammon of Knight Frank Finance told the paper.
A trading update from Taylor Wimpey yesterday supports our view that conditions are improving. Excluding bulk sales, the company's net private sales rate for the year to 21 April 2024 was 0.69 per outlet per week, up from 0.66 the previous year.
"We have made a good start to 2024 with the Spring selling season progressing as expected," says Taylor Wimpey chief executive Jennie Daly. "While we are mindful of ongoing market uncertainty and affordability challenges, it is pleasing to see continued market stability supported by good mortgage availability and sustained customer confidence."
In other news...
Inheritance tax brings in record £7.5 billion (Times), and finally, UK firms told to urgently review green claims amid crackdown (Bloomberg).