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Deteriorating economic outlook hits sentiment

We now think that the reduction in consumer real incomes due to high inflation will push the economy into recession this year. But the Bank of England is likely to have to keep on raising interest rates regardless in order to bring inflation back down to acceptable levels. The impact of the rise in mortgage rates so far, from a trough of 1.4% last autumn to 2.9% in June, is already weighing on buyer demand. Indeed, the main driver of the drop in the Building Society Association’s measure of buyer sentiment to a 14-year low in June was the rising cost of monthly mortgage repayments. Given lenders margins are still slim by past standards, and that we think Bank Rate will rise further from 1.25% now to 3.00% next summer, demand will continue to weaken. As a result we think that house prices will stall by the end of the year before falling by 5% over the course of 2023 and 2024. Bank of England Drop-In (4th August, 10:30 ET/15:30 BST): Join our post-MPC, 20-minute online briefing to find out why we think UK rates will rise by more than most expect, despite a looming recession. Register now.    

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