Central banks begin to confront the energy shock

Shares in Asia-Pacific surged overnight and oil dropped below US$90 a barrel after US President Donald Trump announced that a deal with Iran to open the Strait of Hormuz could be signed as soon as this weekend.

After four months of false dawns and reversals, weary investors could be forgiven for tuning it out. But the conflict remains the most tangible threat to the global economy – and some central bankers aren't waiting to find out whether an end is near.

The European Central Bank became the first in the G7 to raise rates yesterday in the face of what ECB president Christine Lagarde called a “major energy shock”. The quarter-point hike to 2.25% comes after Eurozone inflation hit 3.2% in May. Energy prices climbed 10.9% year-on-year.

Drifting lower

The Bank of England and the Federal Reserve will publish decisions next week. The BoE faces a different set of circumstances – at 3.75%, the base rate is more restrictive than the ECB’s. Unemployment is rising, pay growth is softening and inflation expectations remain anchored for now. Investors expect a hold but are pricing in at least one hike before the end of the year.

Mortgage rates have drifted lower in the past fortnight, which should help shore up a housing market that was already showing signs of stabilising in May. New buyer enquiries in the RICS Residential Market Survey, published yesterday, registered a net balance of -34%. That’s still a meaningful contraction, but it’s the first time since January that the metric hasn’t worsened. The average time to complete a sale has stretched to 21.5 weeks, which is the longest duration since RICS began gathering the data in 2017.

Still, near-term sales expectations registered -25%, up from -32% previously. Sales expectations over the twelve-month time-horizon climbed to +2%, up from -6% previously. Supply is beginning to tighten – new instructions eased to -8%. New appraisals fell to -16%.

Rental imbalances

The Renters’ Rights Act came into force while agents were being surveyed by the RICS. Tenant demand climbed to +14% as the landlord instructions remained entrenched at -28%. As a result, rental price expectations accelerated to +36%, from +28% the previous month – that’s the highest reading since May 2025.

This isn’t solely down to the RRA, of course, but rather the steady erosion of landlord profits by a long series of changes to tax and regulation. Tom Bill unpacked the data from prime London markets earlier this month, average rents in prime outer London increased 3.2% in the year to May, which was the highest increase since June 2024, when rents were still coming down from pandemic-era highs. A monthly increase of 0.5% was the highest since September 2023.

The number of new rental listings in prime central and prime outer London was 13% below the five-year average in May and 11% lower than the same month last year, Rightmove data shows. As a result of this imbalance, there were 6 new prospective tenants for every new rental property coming onto the market last month, the highest ratio since September 2022. 

Population caps

Swiss voters this weekend will vote on capping the country’s population at 10 million people. Polling currently has the race too close to call.

The initiative driven by the rightwing Swiss People’s Party is in part due to increases in rents and house prices caused by immigration, alongside pressure on public services and infrastructure. Quite apart from what it would mean for free movement within the EU, it's unclear whether capping the population would have the intended effect on prices.

As Anna Ward points out, tighter limits on EU labour could lead to deeper shortages, particularly in construction. That would mean higher build costs and slower delivery. About 43% of workers in construction are non-Swiss.

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