‘Belt and braces’ Bank of England leaves rates on hold
The Bank of England’s Monetary Policy Committee (MPC) left the UK Base Rate unchanged at 5.25% yesterday, which was widely expected. More of a surprise was the votes cast for the decision – seven in favour of no change, two supporting a cut. This was unchanged on the previous MPC rate meeting, demonstrating that a clear majority on the committee are in no hurry to begin loosening policy. However, the minutes for the meeting mentioned that some of the seven who voted for no change considered their decision to be ‘finely balanced’, thus shifting speculation towards the possibility of an August rate cut.
The latest inflation figures showed the CPI index grew by 2.0% in the year to May – hitting the Bank’s target figure. That services inflation remained high at 5.7% in May, plus the backdrop of a general election, had persuaded many commentators to forecast no change for the Base Rate at this meeting. However, the MPC’s press statement accompanying the rate decision acknowledged that it is the most volatile items in the services inflation basket of indicators that are currently elevating the figures.
The Bank stated it believed that the that UK GDP will grow in Q2 by 0.5% q-on-q – the long-term average is 0.6%. So, the MPC are perhaps of the view that while growth is holding up they can afford to take the time to ensure inflation really has returned to target, to ensure the May CPI figure of 2.0% was not a one off. A ‘belt and braces’ approach.
Earlier yesterday the Swiss National Bank cut its policy rate by 25 bps, its second cut this year. The ECB and Bank of Canada cut for the first time earlier this month by 25 bps each. The US Federal Reserve left rates on hold at its last meeting and is guiding that it wants to see more data before reducing rates. The Fed holding steady has provided some psychological cover for the Bank of England to do the same. However, the big picture is that the global cycle for interest rates is turning towards cutting, and going forward pressure will build on the Bank of England to join the trend.
Forthcoming Bank of England MPC meetings this year will fall in August, September, November and December. Given the ‘finely balanced’ comment, and that the general election will soon conclude, a 25 bps rate cut in August remains our central forecast. However, if come August enough MPC members want to see more data then a September cut grows as a possibility. So, as always, much depends upon the next round of figures.
From a property market perspective, while investors would doubtless have welcomed an interest rate cut the market has successfully adapted to a 5.25% base rate, so we doubt today’s MPC decision to hold rates will have any negative impact. Indeed, with the economy growing and several property market indicators pointing to a levelling out for pricing and sales volumes, we believe that after the seasonal August slowdown there could be significant interest among cash-rich investors in making acquisitions to catch the cyclical turning point.
