Bank of England cuts rates to support growth

The Bank of England’s Monetary Policy Committee (MPC) today met market expectations and cut the Base Rate by 25 bps to 4.5%. In the accompanying statement the Bank noted: “GDP growth has been weaker than expected at the time of the November Monetary Policy Report, and indicators of business and consumer confidence have declined.” The Bank also halved its prediction for UK GDP growth in 2025 to 0.75%, down from 1.50% in its November forecasts. This looks bearish compared to many private sector forecasts.

Interestingly, two rate setters voted for a larger cut of 50 bps, which shows concerns are growing within the committee that policy needs to loosen at a faster pace. This hints at future reductions ahead, and we believe at least another 75 bps of cuts will be seen for the Base Rate in 2025, possibly 100 bps.

As well as moving to support the economy, MPC rate setters may also be hoping to anchor expectations for market interest rates, given gilt yields have been on a rollercoaster journey in recent months. On 29th October 2024 (the day before the Autumn Budget) the 10-year gilt yield was 4.30%. By 14th January 2025 it peaked at 4.86%, and today it stood at 4.43%. This has created an uncertain environment for lending and investing. The Bank will be hoping today’s cut will send a message to the financial markets that it plans to create a lower rate (and thus a lower yield) environment.

The Bank of England’s rate cut follows suit on the ECB’s 25 bps reduction in January, but marks a step away from the US Federal Reserve which last month left its policy interest rate unchanged. Bearing in mind the Bank of Canada has cut interest rates six times in the last year and is down to 3.00%, there is a clear divergence emerging between the US Fed and other major central banks. A robust US economy means the Fed is now moving slowly on rate cuts, but in contrast fading growth is persuading other central banks that there is a pressing need to support their respective economies.

One of the consequences of this divergence between the Fed and ‘the rest’ is that the US dollar has strengthened, which will have implications for UK real estate. A strong dollar will put US buyers in a good position when acquiring in the UK at a time when evidence is mounting that the downturn for property is certainly through the worst; and in the case of some markets, like industrial and residential, moving into a recovery. The UK has historically drawn significant US investor interest. That Britain offers better political stability in 2025 compared to some other major European property markets will also be an attraction.

For the property sector, winter 2024/2025 has been an uncertain time, with the volatility in the financial markets casting doubt over the timing of the recovery. However, we see the decline in gilt yields in recent weeks coupled with yesterday’s base rate cut helping to restore market confidence going forwards, probably with investors preferring safe haven investments like prime assets with strong ESG credentials that are in core locations.