The industry reacts to slowing inflation

Inflation is finally going in the direction we want it to. Well, ideally, we’d all like it to go into reverse. But at least the cost-of-living crisis is slowing.

After refusing to budge in May, the Consumer Prices Index (CPI) rose by 7.9% in the year to June, down from 8.7%. Make no mistake, this is good news.

We all want our costs to stop rising so dramatically, even if it’s just for the short term. Temporary respite is still respite. It’s frustrating though, that inflation is still so much higher than the Bank of England’s (BoE) 2% target.

In our world, everyone will be wondering what this means for property prices, demand in the market, and interest rates. Imogen Williams, our very own regional sales manager for London and the South West, shared her thoughts on how the figures could sway the BoE at its next vote.

“So, I think now people would expect the BoE to only increase by 0.25% given inflation is easing, however I think people may be surprised,” she said.

“Given its tactic is working, and the success on inflation figures in the US with their aggressive approach to rate hikes, the BoE could still push forward and increase by another 0.5%.”

While we will have to “sit tight” in the run up to August 3, Imogen still welcomed the inflation data which showed there’s “light at the end of the tunnel”.

Across the property landscape though, we found a mixed bag of responses and expectations. As to be expected, there’s no way of knowing for sure what could be on the horizon. But, different perspectives can bring useful insight.

Source: Sky News

“Anyone hoping this is a quick fix I think will have a wait a little longer. But I hope to be proved wrong”

Among those in the broker community we reached out to, there was a definite sense of cautious optimism. Chris Sykes, technical director and senior mortgage broker at Private Finance, saw immediate reactions to the inflation data in the market.

“We have already seen this have an effect to SONIA Swaps – an important factor impacting on fixed rate mortgage pricing – reacting positively to this news and decline further,” he said.

“Today’s news will give lenders more breathing room to maintain mortgage fixed rates and even look at rate reductions sooner than expected if this direction of travel continues.”

Chris added that while the inflation data may alleviate pressures to tighten monetary policy further, additional base rate hikes are still expected by many.

“The mysterious nature of inflation data has made it challenging for markets to project clearly ahead, introducing ambiguity for future Monetary Policy Committee meetings over the current and next year.

“Previously higher-than-expected inflation data had led to market panic and further monetary tightening.

“Hopefully, the lower-than-expected inflation data reported today holds the potential to positively reshape future monetary policy or, at the very least, create a more favourable environment for a stable market recovery to take place.”

Sean Bowling, director and advisor at SBL Financial, shared this optimism. Although, he cautioned against focusing too much on the short-term benefits.

“Well, I think its fantastic news about inflation, and it’s probably a bigger drop than many people expected,” he said.

“I would like to think at the very least the BoE will hold interest rates, but will want to see inflation results on the longer term.

“That being said, I am sure the BoE will want 3-6 months of stable inflation or further reduction before they consider reducing rates and anyone hoping this is a quick fix I think will have a wait a little longer. But I hope to be proved wrong”.

Ultimately, Sean welcomed the fact that we’re moving in the right direction. He hoped lenders would take note, and that this will lead to stability and calm in the swap market.

“However, these turbulent times gives opportunities for buyers and although the cost of borrowing may be higher, you’re probably more likely to grab a bargain as it’s a buyers’ market!”

“We can’t hide from the fact that inflation remains a long way off the government target”

Juliet Baboolal, partner at Seddons, reminded property investors and borrowers of how slowing inflation can impact real estate from multiple angles. The results could be varied, and interpreted differently when explored via local market conditions, government policies, and other macroeconomic factors.

“Admittedly, the slowing down on inflation can have a positive impact on credit risk for banks,” she said.

“When inflation rates are high, borrowers may struggle to repay loans due to the increased cost of living.

“However, with slower inflation, borrowers may have better debt-servicing capacity thus reducing the risk of loan defaults and improving the overall credit quality of the banks’ loan portfolios.”

A slowing inflation rate may result in lower rates, ultimately making finance more affordable. It can also preserve the value of rental income, while cutting the risk of rising operating expenses.

All of which, Juliet argued, could lead to improving investor sentiment and confidence in the economy at large. This could filter through to the property market, but there are also potential issues we need to be weary of.

“There is however a potential downside to slowing inflation as it can result in economic slowdown or stagnation.

“This can affect certain sectors and businesses, leading to higher non-performing loans for banks.

“If borrowers face financial difficulties due to a sluggish economy, banks may experience an increase in loan delinquencies and defaults.”

Juliet also noted that slowing inflation can lead to lower yields on government bonds, which may reduce investment returns for banks. This can affect a bank’s overall profitability, and may force a rethink on how they operate.

“The specific effects on banks of slowing inflation will depend on overall economic conditions, monetary policies implemented by the BoE, and the individual bank’s business model and risk management practices.”

Jeff Knight, director and founder of the Mortgage Marketing Forum, also welcomed the recent drop, but argued we need to be more realistic with our targets.

“Yes, this has been received as good news, or at least better news than before,” he said.

“However, we can’t hide from the fact that inflation remains a long way off the government target. I still maintain that the target should be reset to a more realistic level as that would settle market nerves.

“I also believe it will take quite some time to hit that target, because we are using a blunt instrument (interest rates) to tackle the problem. So, whilst this was good news, it is some way off before we can begin to relax.”

Indeed, with the next Monetary Policy Committee (MPC) vote due next week, the BoE will have much to contemplate. The markets can never be sure for certain on how the base rate will move but nevertheless, they’re currently pricing in rates to rise to at least 6% by the end of 2023.

Huw Pill, the BoE’s chief economist, recently confessed to a conference of central bankers that the MPC’s economic forecasting model has become “unworkable” during the inflation crisis. Meanwhile, Andrew Bailey, the Bank’s governor, said that interest rates would need to stay higher for longer because of persistent inflation.

Looking ahead, it seems unlikely that rates will be dramatically lowered until inflation nears its 2% target. Let us hope that it gets there sooner rather than later.

Source: inews