Bank of England cuts Base Rate by 25 bps
As was widely anticipated, the Bank of England Monetary Policy Committee (MPC) decreased its policy rate from 5.00% to 4.75% yesterday. The committee vote saw eight rate setters favour a cut, with one preferring no change. The move was partly a response to inflation falling below the MPC’s 2.0% target in September to 1.7%. Also, the general trend among the major central banks around the world is towards cutting interest rates, and had Threadneedle Street not followed suit it may have risked sterling volatility.
Strong dollar
While there was little doubt a cut was coming this month, there is now debate on whether going forwards the MPC might reduce interest rates at a slower pace than was previously expected. This is due to two important recent developments. Firstly, the UK government’s Autumn Budget contained some potentially inflationary measures, like the rise in the minimum wage and plans for £100 billion of public sector investment. The Bank expects the Budget to add around 50 bps to inflation next year and 75 bps to GDP growth. Second, financial markets are now pricing in a stronger dollar due to President Trump’s win in the US election. The UK imports a lot of commodities which are priced in US dollars, so a rise for the greenback might stoke inflation.
Global investors will be closely monitoring events in the US regarding the impact of the upcoming Trump administration’s economic and trade policies. Some analysts are forecasting the proposed higher tariffs on foreign goods will push up inflation in America, leading to a slower decline for US Federal Reserve interest rates.
Rising gilt yields
Lately, the 10-year gilt yield has risen and inevitably this will be a pressure on UK property yields, particularly for secondary stock and tier two markets. However, given occupier demand and rents are holding up well for most sub-sectors and buyer interest is starting to pick up again, we are not expecting further yield correction for prime assets. It is also worth remembering when hearing news of a strong dollar that US investors (and those with dollar-shadowing currencies) have historically favoured UK property.
Overall, we remain convinced that property as an investment has cleared the turning point and is on course for steady recovery in 2025 and 2026. We see the UK economy strengthening next year on higher consumer spending supported by lower mortgage rates and the rise in the minimum wage. On the commercial side of the economy, the GDP figures point to robust growth for the business services sector, particularly professional, scientific and hi-tech industries. These factors will support occupier demand and in turn build the case for investing in property. However, the upwards trajectory for investment we currently anticipate is likely to consist of a gradual rise, not a sharp rebound.
