Bank of England turns hawkish as Base Rate remains steady at 4.5%
At its March meeting, the Bank of England’s Monetary Policy Committee (MPC) left the Base Rate unchanged, mirroring the US Federal Reserve’s decision the previous day. This was widely expected by forecasters, although a surprise was the pattern of voting by committee members, with eight favouring no change and just one advocating a cut of 25 bps. At the February meeting, seven voted for a 25 bps reduction and two for a 50 bps a cut.
This implies the MPC’s mood has become more hawkish, hinting at a slower pace of reduction ahead for interest rates this year than was previously assumed. This will have implications for the property market.
Since the last MPC meeting in February, the data has pointed to slowing activity for the UK economy but with price rises gaining momentum. UK GDP contracted in January on a month-on-month basis, declining by 0.1%, but inflation increased from 2.5% in December to 3.0% in January.
The MPC’s accompanying statement for the rate decision revealed concerns are growing among committee members on the strength of the international economy. Activity in the Eurozone was described as “subdued”, while the Bank of England (BoE) said US GDP growth was “expected to slow on the back of tariff and wider policy uncertainty”. They also cited volatility in global financial markets, and diverging paths for bond yields in the US and Europe, further adding to the air of caution.
In our opinion, the MPC is taking the view that with so much uncertainty facing the global economy and financial markets, at least in the short-term, it is safest to do nothing for now and let events play out. The recent, stronger-than-expected, rise for UK inflation has provided the justification to leave rates unchanged.
However, the MPC statement cited a recent BoE survey that found market participants are predicting the Base Rate will fall by another 75 bps this year, which could be seen as a hint that later this year, if the data justifies it, rate cuts may follow.
BoE is forecasting inflation to rise in the coming months, but then recede again later in the year. So, our prediction is for three more Base Rate cuts in 2025 of 25 bps each.
Turning to the property market, today’s MPC decision strengthens our view that the real estate investment market faces a gradual recovery not a rebound. Gilt yields are higher than six months ago, while confidence in the economic outlook has decreased over the same time scale, which is not a backdrop to which one could easily construct a bull case for property investment.
However, there is some cause for some optimism, as the MSCI UK monthly capital growth index has grown m-on-m for seven consecutive months to February 2025 at an all-property level, driven largely by the industrial and retail sectors. While offices have been the out-of-favour sector up until now, anecdotally we are encountering an improvement in sentiment, with more investors believing the sector is at the turning point. After all, occupier market data for major city office markets point to strengthening take-up levels and evidence of prime rental growth in some core districts.
The buzz word among commentators today to is ‘uncertainty’, but medium- to long-term expectations for the economy are for a gradual improvement in growth and lower interest rates further down the line. We believe this supports a gradualist property investment strategy, focussing initially on core districts and prime assets until the economy builds stronger momentum.
