Sweet dreams for borrowers or Nightmare on Threadneedle Street?
Welcome to the latest Wokingham Weekly Wrap covering Mortgages, Markets and Property.
The first full week after the General Election has been a positive one: positive for the UK economy, which grew by a better-than-expected 0.4% in May, for the Pound, which hit a one-year high, for the FTSE 100, which ended the week in the green, and for the property market — despite hawkish comments from Bank of England Chief Economist, Huw Pill.
In a speech to the Asia House think tank on Wednesday, Pill welcomed the news that the headline inflation rate returned to the 2% target in May but said: “It is not enough to meet the target in a transitory or fleeting way. Rather the MPC must achieve the inflation target on a lasting and sustainable basis.”
He then added: “The difficulty in extracting signals about changes in the low frequency persistent component of inflation from noisy higher frequency indicators has not disappeared. Nor is it likely to in the coming months.”
The audience had no idea what that meant, other than the fact that Huw probably isn’t a hellraiser on a night out. Traders did, however, and the financial markets, which had been betting 60-40 in favour of a rate cut, immediately reacted and reduced the odds to 50/50.
But there’s still hope for that first cut to the base rate since early 2020. Wage growth, the main culprit for services inflation, is expected to cool further next week.
Mortgage rate cuts continue apace
Cooler wage growth may be why lenders are viewing things differently to markets.
Over the course of this week, mortgage rates have continued to tumble, with major players such as Nationwide, Halifax and Barclays making further reductions to fixed rates.
But perhaps the clearest sign that lenders are expecting a cut in Bank Rate came from Virgin and Clydesdale Bank, who announced a 0.25% reduction to their Standard Variable Rates on Thursday.
It’s rare for lenders to tinker with their SVRs unless there is an official adjustment to the base rate, so this move may suggest they feel one is coming.
Even surveyors upbeat
You know it’s been a positive week for the property market when even surveyors are more upbeat. After all, your average surveyor makes Huw Pill look like Happy Mondays frontman, Shaun Ryder.
In its latest residential property market report, the Royal Institution of Chartered Surveyors (RICS) said that, over the next three months, a net balance of +20 of survey respondents anticipate a recovery in residential sales, up from +10 in June.
According to Tarrant Parsons, RICS Senior Economist: “There are some factors emerging now that could support a recovery in the months ahead. If the Bank of England does decide that the current inflation backdrop is benign enough to start loosening monetary policy next month, this may prompt a further softening in lending rates.”
That’s a truism, but even if the Bank of England doesn’t lower the base rate next month, an analysis by Newspage of its data found that mortgage approvals have risen by 4.4% on average in the three months after the previous eight General Elections compared to the three months before. So demand for property, if history is a guide, should rise between now and September. And that, in turn, should support house prices.
Positive news across the pond
Looking forwards, next week we get the all-important UK inflation data, which will be a key driver of the Monetary Policy Committee’s decision on August 1st.
Current consensus estimates see headline inflation remaining sticky at 2%, with core inflation stuck at 3.5%. While this indicates that a rate cut hangs in the balance, it also sets low expectations, as a CPI print below estimates could reignite hopes of a reduction in a few weeks’ time.
But even if we have a nightmare on Threadneedle Street in August, with the Monetary Policy Committee once again erring on the side of caution, it may be that borrowers and the UK property market have been saved by prices at the pumps 3.5 thousand miles away.
In June, US inflation cooled to 3% from 3.3% in May, largely due to lower petrol prices. This, markets reckon, may just have paved the way for the US Federal Reserve to cut interest rates as early as September.
And history shows that where the US leads on rate policy, the UK tends to follow.
If you are looking for a new home, contact Nick or Teresa at Quarters Residential Estate Agents, Wokingham on 0118 466 0292 (call or WhatsApp) or e-mail [email protected] – we’re here to help!
