Sharp fall in inflation offers reprieve for housing market

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A sharp fall in inflation delivered a boost to the housing market on Wednesday as City traders cut their bets on further Bank of England interest rate rises.

Shares in Britain’s listed housebuilders surged to enjoy their biggest one-day gain since 2008 after official figures showed inflation eased to a 16-month low of 7.9pc in the year to June.

This was down from 8.7pc in May as petrol prices tumbled and food price rises slowed. It was also well below the 8.2pc expected by economists.

The FTSE 100 surged and UK government borrowing costs tumbled, with the data also implying mortgage rates will ease in the coming weeks after more than a month of dramatic upward increases.

Oliver Laver, of Mortgage Key, said the market was likely to stabilise after a series of sharp increases in borrowing costs by high street lenders.

He said: “The latest data will enable lenders to stabilise. It’s still a volatile market. We need a few more forecasts to be right or outperformed before rates fall. But we will see a stop to rates increasing,” he said.

Britain’s blue chip index closed up 1.8pc, while the domestically-focused FTSE 250 climbed almost 3.8pc.

Persimmon, Britain’s second-largest housebuilder, led the charge among listed property developers with its shares jumping 8.3pc. The UK’s largest developer Barratt Developments and Taylor Wimpey both rose 6.4pc, while shares in Berkeley Group rose 5.2pc.

The industry had been boosted by years of low interest rates, which helped with financing to build new homes as well as aiding buyers with cheap mortgages.

But that changed when the Bank of England started a rapid series of interest rate increases in December 2021. Barratt last week said demand from first-time buyers had halved over the past year, as they are particularly vulnerable to rising borrowing costs.

While the fall in inflation was welcomed by traders, the headline rate is still almost four-times the Bank of England’s 2pc target. Sir Dave Ramsden, deputy governor at the Bank, described it as “much too high”.

As a result the Bank’s Monetary Policy Committee (MPC) is expected to raise interest rates to 5.25pc next month, rather than 5.5pc previously expected.

Traders in financial markets expect the base rate to peak at 5.75pc later this year, instead of the peak of 6.25pc forecast last week before inflation number was published by the Office for National Statistics.

In part this is because core inflation, which strips out volatile energy and food costs, fell from 7.1pc to 6.9pc, and producer price inflation, which measures input costs facing businesses, turned negative, falling 2.7pc on the year. These raise hopes that consumer price inflation is at last coming under control, after peaking at 11.1pc last October.

Sir Dave indicated the battle against inflation is not over yet.

He said: “CPI inflation has begun to fall significantly but remains much too high. The MPC has consistently stressed that monetary policy decisions will address the risk of more persistent strength in domestic wage and price settling.

“The MPC will continue to closely monitor indications of persistent inflationary pressures in the economy as a whole, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. If there is evidence of more persistent pressures, then further tightening in monetary policy would be required.”

The deputy governor added that the experience of quantitative tightening over the past year – ditching bonds which the Government bought under quantitative easing – has gone smoothly, indicating the Bank can look at “a carefully considered increase in the pace of reduction in the stock of gilts in the twelve months ahead”.

This effectively means he is considering tightening this part of monetary policy more quickly, despite expectations of smaller rises in interest rates.

The Government’s borrowing costs have fallen in line with changing expectations, with the interest rate on two-year gilts down from 5pc to 4.9pc.

Sterling fell 1.1pc against the dollar from more than $1.30 to just under $1.29, and 0.95pc against the euro, to $1.151.

Two-year swap rates in financial markets – a leading indicator for mortgage rates – fell by 0.3 percentage points on Wednesday morning, from 5.73pc to 5.42pc.

However, not all mortgages will necessarily follow this pattern immediately.

NatWest announced it is raising the interest rate on a range of home loans, with fixed-term mortgages increasing by as much as 0.4 percentage points.

The average two-year fixed residential mortgage rate rose to 6.81pc on Wednesday, up from 6.78pc the day before, according to data firm Moneyfacts.

However the main effect of the fall in markets’ rate expectations is expected to be that mortgage rates stop increasing and may ultimately start to come down sooner.

Separate data showed the number of corporate mergers and acquisitions in the first half of the year slumped by a fifth on a year earlier, as high interest rates made financing deals difficult.

The figures published by PwC showed that the 1,902 deals which took place were typically smaller than those a year ago – they totalled £42.8bn by value, down more than half from £95bn 12 months earlier.

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