Inflation figures published on Wednesday all-but confirmed that the Bank of England will do more to bring inflation back to target. A 25bps hike to 5.50% in September now looks certain, and there’s a meaningful chance of another nudge to 5.75% before the end of the year.
UK inflation is now falling rapidly, flattered by falling energy prices. While that’s good news, the figures will coax the Bank of England (BoE) into raising the base rate at least once before the year is out.
The annual rate of consumer prices inflation (CPI) eased to 6.8% in July, down from 7.9% in June, the ONS said on Wednesday. That’s broadly in-line with economic consensus, but measures of core prices and particularly services inflation continue to rise at a rate that will worry policymakers on Threadneedle Street. Core CPI, which excludes volatile aspects like energy and food, was unchanged at 6.9%. The CPI services annual rate rose to 7.4%, from 7.2% a month earlier.
The reading of services price inflation is perhaps predictable given the fact that wage data published on Tuesday showed the fastest annual rate of growth since comparable records began in 2001. It’s unlikely that the Bank of England will feel comfortable ending its tightening cycle before the labour market cools meaningfully.
We’ll get another round of employment and inflation figures before the next Monetary Policy Meeting on September 21st, and that may hold better news on those fronts, but a 25bps hike to 5.50% is now more or less certain. Whether the BoE opts for another nudge to 5.75% before the year is out will depend on how the data pans out.
Investors are now very sensitive to data releases. The mid-July positive inflation print prompted a 7% intraday rise in the UK REIT Index, for example – the biggest one-day gain since March 2020. Similarly, at the time of writing the 10-year gilt yield – a crucial benchmark influencing the price of real estate – had climbed over 20 bps to 4.7% since the end of last week. The Sonia forward curve has moved from pricing in an outside chance of Bank Rate hitting 6.50% at the end of June, to 5.75% at the end of last week, and back up to 6% yesterday.
Decision-making in volatile conditions is particularly difficult, and many direct real estate investors have been waiting for clarity on interest rates before acting. Investors spent £18.5bn on commercial real estate during the first half of the year, down 52% compared to the same period a year earlier and about a third below the ten-year average.
Those that have been waiting for clarity will want to wait at least another month, and we expect investment volumes to remain subdued for now. Vanessa Hale, Head of Research at BNP Baribas Real Estate, published a detailed take on how we expect the second half of the year to progress last week.
There was little in yesterday’s figures to change our view that volumes will improve marginally in the second half of this year, and sentiment will follow upon the arrival of peak rates.
