Bank leaves Base Rate unchanged, but slows bond sales
The Bank of England’s Monetary Policy Committee (MPC) voted to leave the Base Rate steady at 4.00% at its September meeting, but chose to reduce the amount of bonds it sells from its balance sheet in the next twelve months. The previous day, the US Federal Reserve cut its policy rate by 25 bps.
With UK CPI inflation at 3.8% in August, it was widely expected that interest rates would be left unchanged. However, the Bank is standing by its forecast that inflation will slide from Q4 2025 onwards, and it is worth noting that two of the nine MPC members did vote for a 25 bps cut. This shows that the idea of a cut to the Base Rate in the short term is not entirely off the table, even if it is now looking a low probability for the remainder of this year. Indeed, the press statement for today’s decision does mention “future reductions”, which we think are now more likely to occur in 2026.
While headline inflation has rebounded, core inflation (which excludes volatile prices, like food and fuel) has been relatively steady lately. Traditionally, central banks often ‘look through’ increases in inflation driven by the volatile items in the CPI basket of measured goods. This is why we are seeing two MPC members vote for a rate cut when inflation is well over the 2.0% target.
Turning to the decision to slow the volume of bond sales. During the Covid pandemic, the Bank of England aggressively bought gilts, to pump money into the economy, a process known as Quantitative Easing (or QE). Recent years have seen the Bank begin the process withdrawing that money, in what is called Quantitative Tightening (QT). In the last year, the Bank has sold £100 billion worth of gilts, as QT reverses QE. However, concerns have grown that by doing so, the Bank is worsening an upwards trend for longer dated gilt yields, which is straining the finances of the government.
So, the Bank will in the next 12-months sell £70 billion of gilts, and just 20% will be longer dated bonds. This should ease some (but not all) of the pressure on gilt yields, plus help the Chancellor a little as she approaches a difficult autumn Budget.
Consequently, we believe that another Base Rate cut this year is unlikely, unless the GDP or job market figures were to sharply deteriorate. However, assuming the forecast fall in inflation begins in Q4 2025, we are predicting two cuts totalling 50 bps to the Base Rate next year.
As mentioned above, Wednesday saw the US Federal Reserve reduce the Fed Funds Rate by 25 bps to 4.25%. The latest ‘dot plot’ forecasts indicated most of the Fed rate setters are anticipating further reductions of around 50 bps before the end of this year.
Turning to the impact on property markets, macro-economic and political surprises – from the Trump tariffs to the concerns over the Chancellor’s fiscal headroom – have meant investors have been more cautious in deploying capital this year than many were predicting back in January. The prospect of another austerity Budget may encourage some investors to take a ‘wait-and-see’ approach in October and November.
However, the Bank of England has shown it is prepared to take action to ease financial market jitters on gilts, which should indirectly help support property yields. Moreover, occupier market fundamentals remain sound, with vacancy rates either stable or edging lower, and prime rents in many core districts rising. That the Bank of England is in no hurry to cut rates shows they expect the economy to hold up, which bodes well for occupier markets going forwards.
We feel that lately property investment markets, particularly for offices, are exercising a degree of caution that feels disproportionate to the risks, given occupier market indicators are mostly stable to improving. After all, a steady occupier market is the bedrock of a sound investment market.
When the Budget is out the way, and assuming inflation starts to fall again later in the year, we believe that many investors will revisit property and conclude that there is a strong case for buying into the recovery.
