Shock government figure means likely delays to first rate cut

There are growing fears that the hoped-for Bank of England base rate cut this spring - the first off possibly several this year - could now be delayed. 

The consumer price index measure of inflation was up from 3.9 per cent a month ago to 4.0 per cent in the year to December, according to the Office for National Statistics. A fall to 3.8 per cent had been widely expected. 

As if this was not bad enough, there have been growing expectations that inflation in the coming months will rise thanks to the increased shipping costs due to Red Sea diversions. This has not have been captured by the released data so any effect will now be seen in February.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, says: “We always knew inflation doesn’t rise and fall in straight lines, but this demonstrates that the path is going to be bumpy … The market had been predicting a rate cut as soon as May, we’ll have to see whether this surprise rise in inflation prompts something of a rethink. The Bank of England has continued to emphasise that interest rates will stay as high as they have to for as long as is needed, so we could see this pushed back a little.” 

And Nicholas Hyatt, an investment analyst at Wealth Club, has also become pessimistic.

“Policy makers, mortgage holders, investors and the average shopper had all been hoping price rises continued to slow over Christmas  - clearing the way for lower interest rates and easing the cost of living crisis. Christmas was particularly expensive for those indulging over the festive break, with alcohol and tobacco the driving forces behind the uptick inflation, although food and non-alcoholic drinks continued to see inflation slow. 

“But, while the rise in headline inflation will attract the attention, longer term its the stubbornly high core inflation that is a greater concern. Still running at over 5.1 per cent, until this comes down the UK will be very vulnerable to global economic shocks that cause spikes in food and energy prices  - and we've seen all too many of them recently."

How different that inflation figure has made predictions of rate cuts.

Just days earlier a prominent residential market expert said there could be as many as five mortgage rate cuts from the Bank of England this year - and he had boosted his forecast for the housing market as a result.

Tom Bill, head of Knight Frank’s residential research team, said last week: “In October, financial markets were pricing in a single interest rate cut of 0.25 per cent by the end of 2024. [Now] they are expecting five. The main reason for this changing outlook is that inflation is falling faster than expected. As a result, mortgage lenders have dropped their rates fairly significantly in recent weeks, partly to win business in a low-volume market.

“The best five-year fixed-rate mortgage is now under 4.0 per cent, which was made possible after the five-year swap rate fell a full percentage point over the final quarter of 2023. As a result of this more positive backdrop, we have revised our UK house price forecasts from three months ago.”

On the sales side Knight Frank now expects UK mainstream prices to rise by 3.0 per cent in 2024, which compares to a decline of 4.0 per cent predicted in October. It expects cumulative growth of a meaty 20.5 per cent in the five years to 2028.

Bill states: “Data from Halifax and Nationwide certainly suggests a corner is being turned. While the former reported a 1.7 per cent increase in 2023 and the latter posted a fall of 1.8 per cent, that compares to a 5.0 per cent decline that both identified in August. With UK housing transactions a fifth below their five-year average, we waited until a clear pattern emerged showing prices were bottoming out, which we believe is now the case.

“As a result of stronger demand, the number of mortgage approvals was 10 per cent higher in November than the previous year and we expect a double-digit percentage increase in sales volumes this year compared to 2023.”

On the lettings side, Knight Frank says landlords have left the sector in recent years due to extra red tape and taxes, which has put strong upwards pressure on rental values. However, supply is recovering as demand is gradually being absorbed and more sellers have become landlords in a sales market where price growth has been minimal.

Bill says: “New listings in Prime Central and Prime Outer London were only seven per cent below the five-year average in December, Rightmove data shows.

We have not altered our rental forecasts dramatically from October and forecast 5.5 per cent rental value growth this year in PCL, which would be lower than the 8.0 per cent registered in 2023. Meanwhile, we expect a 4.5 per cent increase in POL, down from 6.8 per cent in 2023.

“Rental value growth should be stronger in lower-value markets as the supply/demand distortions are greater. Property owners are typically more discretionary in higher-value markets and have been able to let while price growth has been flat.

“There were 4.3 new prospective tenants for every rental listing below £1,000 per week in PCL and POL in the final quarter of last year, Knight Frank data shows. Above £1,000 per week, the figure was 2.7.”