Following yesterday's announcement of CPI (consumer price index) inflation remaining at 4%, UK Prime Minister Rishi Sunak stayed positive, telling his 2024 Business Council that the “economy has turned a corner” – but is the outlook positive for investors and the real estate sector?
Lest we forget, it was only 15 months ago that inflation rates were at the highest point for 40 years, peaking at 11.1%, driven largely by high energy costs.
Despite avoiding analysts’ expectations of a slight uptick to 4.2%, the rate is still double the BoE’s target of 2%.
Jacky Chan, Investor Relations at Shojin, and over 15 years’ experience in the real estate industry, share his views:
“Inflation stabilising at 4% is better than what the market had forecasted (4.2%).
This gives the Bank of England confidence that inflation is under control and thus interest rates have peaked.
Debate in the market now is no longer about whether Bank of England will cut rates, but when.
As a result, we are seeing a pick-up in property transactions in the market since the turn of the year, as buyers look at the potential returns that could be generated in a rate cut environment over the next 2-3 years.
This generates liquidity for developers and lenders, and thus is positive for the outlook of 2024.”
We discussed interest rates on our last webinar - watch the full replay
Interest rates
The BoE's decision to increase interest rates to 5.25% in 2022 aimed to combat inflationary pressures.
By raising borrowing costs, the central bank sought to discourage excessive spending and borrowing, thus dampening demand, and easing inflationary pressures.
This move was part of a broader monetary policy strategy to stabilize prices and maintain macroeconomic stability. As Jacky highlights, the BoE's actions to raise interest rates were instrumental in bringing inflation under control.
The higher borrowing costs incentivized individuals and businesses to save more and borrow less, contributing to a slowdown in economic activity and a moderation of inflationary trends. Now that inflation is indeed showing signs of stabilization, it is widely anticipated that the BoE will adopt a more accommodative monetary policy stance—the question is when?
The increased liquidity for developers and lenders, is due to an increased purchasing power, and less of a need to spend money as quickly as possible to stop its value eroding. If inflation does reduce further as predicted, this tends to increase investor confidence and thus increase risk appetite, prompting investors to allocate more capital to financial assets such as stocks and real estate. Stabilization of the inflation rate also helps the predictability of economic conditions, encouraging long term investment horizons, and, hopefully, setting up investors for a prosperous 2024.