Bank of England holds rates at 5.25%

As was widely expected, the Bank of England left the Base Rate unchanged at 5.25%. This mirror’s Wednesday’s US Federal Reserve decision to hold rates steady, although the Swiss National Bank (SNB) has broken ranks and become the first advanced economy central bank to cut its policy rate – from 1.75% to 1.5%.

There were some interesting details in the press statement that accompanied the Bank of England’s decision. Notably, the latest meeting saw eight Monetary Policy Committee (MPC) members voting for holding rates, and one favouring a reduction. However, in February the votes fell as follows: six for no change, two for a rate hike and one for a cut; so there has been a shift in MPC sentiment away from hawkishness.

There was also a paragraph in the MPC’s release that keep its options wide open. It begins:

“Monetary policy would need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. The Committee had judged since last autumn that monetary policy needed to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipated.”

This sounds like the MPC talking down the chances of a rate cut soon. However, the next sentence reads:

“The Committee recognised that the stance of monetary policy could remain restrictive even if Bank Rate were to be reduced, given that it was starting from an already restrictive level.”

So, the MPC has introduced the idea that it can cut rates but still be maintaining an overall restrictive stance, in the same sense a doctor who reduces a patient’s medication dosage is just tweaking the treatment not ending it.

The MPC added that it wants to see more data before cutting rates, which mirrors what the Federal Reserve and the ECB have said.

There is no MPC meeting in April, and the next one falls on 9th May. We suspect given the tone of the current statement and the large majority for no change, that the May meeting will also see rates remaining on hold. The subsequent meeting is in June, followed by a meeting in August.

A sharp drop for UK inflation is being predicted by many (including the Bank of England) in Q2, particularly in April when the Ofgem energy price cap is set to fall by around 12%. If the decline seen in the latest inflation data continues – down from 4.0% in January to 3.4% in February – then a June rate cut might be a possibility. Today’s SNB cut will offer the Bank of England the psychological cover of not being the first to reduce rates. Also, the latest ‘dot plot’ forecasts from the Federal Reserve suggest around 75 bps of rate cuts might be in the pipeline for the US this year.

From a real estate perspective, the relationship between property markets and interest rates is a time lagged and loose one. When a Base Rate cut does occur we would expect any positive impact to filter through further down the line, not rapidly. We expect the early stages of a market recovery to be characterised by a gradual improvement; particularly as high-profile tenant insolvencies lately will probably weigh on sentiment for retail property in the short-term, while structural concerns remain for the office market over homeworking. Market bifurcation will continue between green buildings and secondary / tertiary office buildings even with an interest rate cut. However, lower rates will be needed to help secure finance to redevelop or refurbish older assets into ESG-compliant buildings ready for when the institutional investors return to the market.

In the housing market, despite the Base Rate being held, reduced inflation expectations mean that mortgage lenders are likely to reprice products and we should see lower mortgage rates, which will provide some stimulus for the housing market. When the Base Rate does start to fall we may see a more substantial repricing of mortgage rates, leading to a significant boost to housing market activity.

Today’s ‘flash’ UK PMI data points to growth for UK businesses, which will increase confidence that the recovery reported in the January GDP figures is likely to continue in the coming months. We believe that if more evidence emerges that the economy is strengthening then property investors with dry powder will choose to re-enter the market to buy at the low point. While we do not believe that point has quite yet been reached, we are also confident it is approaching, probably with industrial property leading the recovery. Within the other two main sectors, we are forecasting well-located city centre offices with strong ESG credentials and retail warehouses will outperform their respective sectors.