At the time of writing, Andrew Bailey had stated to the select committee that rates were "much nearer" their peak than before. This is an interesting statement taken in isolation; you could argue that being perched on the Hillary Step is much nearer the summit of Everest than base camp, but it doesn't make the struggle to the peak any less of a perilous toil, however, in this week's blog we unpack the positive sentiment in the message and ponder how this may affect our market.
The MPC committee meeting on September 21st may or may not be a decisive turning point in the narrative of the UK economy. The broader sentiment is that the market may have already priced in two more moves, with the peak potentially being 5.75%; however, the Financial Times highlighted that the statement "There was a period where it seems to me it was clear that rates needed to rise . . . and the question for us was how much and over what timeframe, but we're not I think in that phase any more" was ambiguous enough to warrant some positive reflection. It's important to remember that the MPC is a committee subject to a vote, so they don't have to all agree; the data needs to sway enough to allow mortgage holders the opportunity to breathe a massive sigh of relief.
Stateside, the Fed is expected to hold where they are in terms of central rates ahead of the UK decision; the concern of a deliberately engineered recession to save the dollar and reduce inflation back to 2% seems to be waning, at least according to Goldman Sachs published market intelligence blogs where they talk of a recovery in real disposable income and a stabilised housing market. Could the UK go the same way? We are obviously in a very different position in a post-Brexit, post-pandemic, and European energy crisis world, so although our economists will take a steer from the Americans, the key things that they will be looking at will be the housing stats on September 20th and the Inflation figures from the ONS on September 20th, that will unpack how embedded core inflation has become.
Looking for clues in the last lot of data released on August 16th from the ONS, we could see that the Consumer Prices Index, including owner occupiers' housing costs (CPIH), rose by 6.4% in the 12 months to July 2023, down from 7.3% in June. Core CPI (excluding energy, food, alcohol, and tobacco) rose by 6.9% in the 12 months to July 2023, unchanged from June; the CPI goods annual rate slowed from 8.5% to 6.1%, while the CPI services annual rate rose slightly from 7.2% to 7.4%. These stats tell us that the decision being debated at the MPC isn't, "Is this strategy working?" We are moving in the right direction; it's how hard we push the lever to escape this situation without breaking the engine.
To try and inject some engaging visuals into this blog awash with dry figures, picture the scene in the movie Jaws, Quint guns the engines of the Orca to lure the shark into the shallow water to drown it, a plan that would have potentially worked if he hadn't had over zealously blown the engines in his desperation to win. The same is true here: high rates are hurting the mortgage market and the lender market, and it would be easy to make some dramatic manoeuvres at this point to try and bring things ahead quickly given the depth of political pressure the bank is under; however, to extend these aquatic metaphors as far as they can go, chumming the water for another bond market debacle, or hanging around for the giant inflationary killer shark both seem equally risky, so a steady course out at this point seems like the correct monetary policy.
As an investment opportunity, the p2p asset class will only continue to strengthen its value proposition as the peak is achieved, as the gap between potential return on investment from traditional fixed-income products in the bond market and p2p will only widen as rates start to fall. These changing conditions will also strengthen the consumer mortgage market and the confidence in the development sector, so with all these circumstances now on the horizon, there is definitely a sentiment change in the air.
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