The Base Rate remains unchanged at 4.75%
The Bank of England’s decision to leave the Base Rate unchanged at 4.75% was widely anticipated following disappointing figures earlier this week on inflation and pay growth. It should also be noted that market interest rates have risen in recent weeks, with the five-year swap rate increasing from 4.06% at the start of this month to 4.34% on 18th December. This reflects a combination of investor concerns over the level of gilt issuance announced at the government’s autumn Budget, plus the contraction reported in the October UK GDP data (-0.1% month-on-month).
This week has seen a run of underwhelming economic data released. On Monday the UK PMI remained unchanged in December at 50.5, which indicates just marginal growth for businesses. Wages growth figures on Tuesday showed an increase from 4.4% in September to 5.2% in October. On Wednesday it was announced CPI inflation rose from 2.3% in October to 2.6% in November. So, the UK is experiencing an economic slowdown as inflation picks up, which leaves the Bank of England caught between two conflicting pressures.
Yesterday saw the US Federal Reserve cut its policy rate by 25 bps, but the accompanying forecasts predicted fewer cuts in 2025 than had previously been anticipated. In general, the mood on interest rates and inflation has shifted both in the US and other advanced economies since Donald Trump’s victory in the November election. The President-elect’s policies are expected to be inflationary, and therefore a more gradual downwards trajectory is expected for US interest rates than was anticipated back in the summer. Because of the US dollar’s ‘gravitational pull’ within the global economy, many expect a slower decline for interest rates in other major economies as well.
The vote split for the Bank of England Monetary Policy Committee (MPC) rate decision was: six favouring no change and three supporting a 25 bps cut. In a recent interview the Bank’s Governor, Andrew Bailey, predicted four Base Rate cuts in 2025, although the futures market is pricing in two cuts. Consequently, we are forecasting a 25 bps Base Rate cut for the February 2025 MPC meeting (there is no January meeting). While inflation has increased, the Bank has latitude of 100 bps either side of the 2.0% inflation target, which in our opinion makes supporting growth the higher priority. Many commentators now believe the autumn Budget has had a dampening effect on the economy, and we believe in 2025 the MPC will opt to counterbalance the negativity by loosening policy.
For the property sector, the recent slowdown for the economy and uptick for market interest rates suggest the sluggish conditions that characterised 2024 will continue into early 2025. However, it should be noted that 2024 was not a blanket difficult year, with the industrial and residential sectors moving into an early-stage recovery. Also, within the retail sector there have been signs of improvement for retail warehouses and parks. Offices remain the more troubled of the main sectors, although leasing demand has held up reasonably well in 2024 in the major city centres.
We believe 2025 will be a recovery year for UK property, but the pace will be a gradual with significant variation in performance based on sector, sub-sector, asset quality and geographic region. We see industrial, residential, retail warehouses and the prime offices in major city centres outperforming the wider market. The secondary market will remain challenging.
