Bank of England cuts Base Rate as US and UK announce trade deal
Yesterday, the Bank of England Monetary Policy Committee (MPC) cut the UK Base Rate by 25 bps to 4.25%, matching the consensus forecast. This followed inflation declining in the latest figures from 2.8% in February to 2.6% in March, plus growing concerns over the outlook for the global economy in the face of the new US tariffs.
Interestingly, the committee vote was split by 5-4, with two MPC members favouring a larger cut of 50 bps, and two preferring no change. So, while the vote superficially appears narrow, in fact there was a significant majority in favour of looser policy, the debate being more a question of degree.
Worth noting is the Bank’s view on the international situation, which was ‘glass half full’. The accompanying press statement said: “Prospects for global growth have weakened as a result of this uncertainty and new tariff announcements, although the negative impacts on UK growth and inflation are likely to be smaller [than other countries].” However, the MPC did warn on the risk of an abrupt slowdown of GDP growth in Q2.
We believe the overall tone of the Bank’s press release, plus the dovish majority on the committee, point to further rate cuts ahead. Our forecast is for two more 25 bps reductions later this year, taking the Base Rate to 3.75%.
In our view, there is a growing contrast between the short-term outlook for the UK economy, and prospects over the medium- to long-term. This should be noted by property investors, given real estate investment is shaped more by long-term prospects.
The spring and summer months are likely to be difficult for the UK economy, with global conditions expected to act as a drag on growth. However, there are positive trends emerging that we believe will improve medium- to long-term prospects for Britain.
Yesterday saw the US and the UK announce a trade agreement, which comes shortly after the conclusion of a UK-India trade deal. The media have also been speculating the UK and the EU are discussing a renegotiation of their existing trade treaty.
Those deals will only lift exports of certain goods and over the long-term. However, we believe they could have a significant impact on sentiment, and fuel a recent trend of investors revisiting the UK as an investment target in the light of several years in which worst case scenarios on Brexit have failed to materialise. Indeed, Britain’s economic performance in the last two years compares reasonably well to other G7 European countries.
Also, we believe as the system of global trade realigns, more overseas corporations will be looking for new markets to operate in, and the UK’s open economy will look appealing. This could lead to inwards investment, and higher occupier demand for property.
Consequently, we are predicting the UK economy will now move into an era where international investors are persuaded Britain has managed to leave the EU and find a place in the global economy without adverse consequences. This presents an opportunity to buy back in at a low point in the investment market cycle for several UK asset classes, including real estate.
Following the financial markets volatility after the rollout of the new US tariff regime, the pound has strengthened, which will further ease inflationary pressures. This should strengthen the case of those on the Bank of England MPC who favour more aggressive Base Rate cuts. Lower interest rates could help support consumer confidence, and improve access to debt for property companies and investors.
We believe well-capitalised property investors will now view this as the low point in the market cycle for UK real estate, and consider the present uncertain economic environment as a weather front that is blowing over and thus temporary. This presents the opportunity to enter the market when competing bidders are fewer in number and pricing is at the low point.
We think offices in particular will attract contrarian investors focussing on the relative strength and stability of office occupier markets in the last year – defying past talk of a structural reduction in demand due to home working.
Our outlook across the main real estate sub-sectors now is for growing interest and buyers conducting due diligence in the spring, followed by the seasonal July-August slowdown; then a strengthening of buying activity when market participants return from their summer holidays in September.
