Bad News For UK Real Estate: Rate Cuts Less Likely After Surprise Inflation Bump
The real estate sector received some bad news on Wednesday as inflation rose unexpectedly, reducing the speed at which interest rates are likely to be cut this year.
Data from the Office of National Statistics showed consumer price inflation was 4% in December. That was only a slight uptick from the 3.9% figure from a month earlier but higher than the 3.8% that analysts expected.
The rise caused bond markets to pull back on their expectations on interest rate cuts for 2024. Prior to the data release, bond traders were pricing in 125 basis points of interest cuts starting in May or earlier.
They are now pricing in around 100 basis points of interest rate cuts starting in the second half of the year. The sharp rise in interest rates since the middle of 2022 has caused real estate investment volumes and values to fall. Investors are looking for interest rate cuts to have a positive impact.
Negativity for the industry was most directly exhibited by falling listed real estate share prices. The FTSE 350 Real Estate Index fell 3.5% on Wednesday, with every share in the index dropping. Big Yellow, British Land and Landsec were the worst performers, dropping 4%. Grainger had the best showing, falling by just under 2%.
Economists were generally in agreement following the announcement of the data that inflation is still on a downward path, anticipating it would likely be below the Bank of England’s target of 2% by the second half of next year.
But the road to lower rates is likely to be bumpy.
“With wage growth still elevated, another large rise in the national living wage from April, and the risk of global geopolitical tensions injecting renewed volatility into commodity markets, the path towards price stability is unlikely to be smooth,” Lloyds Banking Group economist Emma Wilks said.
