As I began to pen a few words for this month’s quarterly report, news broke that the headline inflation in the UK dropped sharply in June. Down to 7.9% from 8.7% the previous month. This was indeed better than had been expected and the market had a strong rally, with the FTSE100 closing +134 on the day (19th July). It may however be too early to describe a drop in CPI from 8.7% to 7.9% as a decisive turning point in the UK’s battle against persistent inflation, but the data at least backs the idea that the trend is finally moving in the right direction.
Only last week there was little sign the UK Inflation problems were under control, with Gross Domestic Product (GDP) figures not helping. There was no growth over the three-month period to May, essentially meaning the economy has flatlined. The Bank of England use of interest rate rises to control inflation, may be starting to have an impact, but GDP is showing little sign of improvement.
We must now ask, where does it leave the Bank of England. After sending a shock wave to mortgage holders and bond markets with a 50-basis point rise in June, economists now feel that the monetary policy committee is unlikely to repeat this at the next meeting on the 3rd of August. Consensus now points to a quarter point rate rise to 5.25%, with the Bank having hiked rates from their 0.1% record low at the end of 2021. The Bank of England still needs to be vigilant and act accordingly until there is a level of certainty that inflation is back under control. Some analysts are expecting the Bank to now stop hiking at 5.5%.
This news pushed the FTSE 100 higher, helped by gains in interest-rate sensitive stocks, with a basket of property shares making up lost ground.
While the housing market remains under pressure, with prices falling and mortgage costs higher, this reaction suggests an element of relief for the sector. Although current valuations for housebuilders share price is in an extended slump for the market, there is still ongoing demand for rental properties, and migration patterns. These are likely to back the long-term story for UK property.
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Stephen Lovelock, July 2023