Bank of England announces first rate cut since 2020
Today, the Bank of England reduced the UK Base Rate from 5.25% to 5.00%. However, the Monetary Policy Committee (MPC) pointed out that even at 5.00%, rates were still in restrictive territory – so this is more a case of the Doctor reducing the dosage of the medicine, not pronouncing the patient cured. The decision to cut the Base Rate was a close call with the vote split at five committee members in favour and four preferring no change.
In the accompanying statement, the MPC noted that inflation had been at the 2.0% target level in both May and June. The statement continued: “GDP has picked up quite sharply so far this year, but underlying momentum appears weaker”. This is perhaps a reference to the volatile retail sales figures seen this year, in part due to bad weather but also because of the strain placed on households by high interest rates. There was also a mention of “a looser labour market”. Unemployment has risen lately, which has probably reassured the MPC that pay growth will slow further in the coming months, and thus weaken inflation.
In the circumstances, a pivot from fighting inflation to supporting the economy appears justified.
However, the Bank’s forecast for inflation has it increasing in the second half of this year to 2.75%, so there may be a gap of months between the first and second rate cuts. Both core and services inflation remain high, and we suspect the MPC will want to see these indicators fall further before loosening policy again. At the subsequent press conference, Governor Andrew Bailey told journalists: “We need to be careful not to cut rates too much or too quickly”. Avison Young Market Intelligence is forecasting another 25 bps cut for later in the year.
The news will also come as a relief to the new government as it will lower the cost of borrowing for the Treasury, and also points to stronger economic growth further down the line which should increase tax revenue. Given the recent controversy over the state of public finances, this could to some extent ease pressure on the Chancellor of the Exchequer as she weighs the scale of the spending cuts and tax increases that will be necessary at the next Budget Speech on 30th October. However, there is little doubt increased taxes and some austerity are coming this autumn, which will act as a brake on short to medium-term growth.
Turning to the implications for commercial property markets, the news will be a shot in the arm for sentiment, although it is unlikely to hugely change debt pricing. So, several rate cuts will be needed to bring about a significant return of heavily leveraged buyers to the market. However, the rate cut will add to a growing sense of positivity on the outlook thanks to better news on the economy and tentative signs of a turning point for industrial and retail warehouse capital values in recent MSCI data. This may bring cash-rich buyers out into the market in the coming months to take advantage of the low point for pricing. However, for offices (other than prime in the best locations) and shopping centres the market remains challenging.
For the housing market, the rate cut announcement today coincided with better-than-expected figures for the Nationwide House Price Index – up 2.1% on a year ago, outdoing the consensus forecast of 1.8%. Also, mortgage rates, having risen in the first half of the year, have in recent weeks started to decline again. Indeed, some lenders cut their mortgage rates yesterday in anticipation of today’s announcement. However, we are not expecting this rate cut alone to have a transformational effect on the housing market, but it will feed into an improvement in sentiment which was already underway before today’s MPC decision.
