The week ahead 12 May 2025 - Base Rate falls as trade deals are agreed
What to watch out for in the UK economy and property market this week.
Last week saw the Bank of England cut the Base Rate by 25 bps to 4.25%, plus the announcement of two important trade deals for the UK. While these developments are unlikely to have much short-term impact on economic growth, we do believe that in the medium-term to long-term they will be significant. Also, the news could boost sentiment at a time when encouraging news on the economy has been in short supply.
The reduction in the Base Rate was widely expected, as the Bank of England pivots from fighting inflation to supporting growth. Of the nine Monetary Policy Committee (MPC) members, five voted for a 25 bps cut, two for a 50 bps reduction and two supported no change. This shows there was a large majority on the MPC for loosening policy, which strengthens our belief that more Base Rate cuts will follow. Our full analysis on the Base Rate cut can be found here.
You can also read more about the Base Rate cut and US trade agreement in our article in CoStar.
Last week also saw the US Federal Reserve leave its policy interest rate unchanged. Many economists are now concerned over the potential inflationary effects in America of President Trump’s tariff hikes. At the weekend, the President hinted that talks in Geneva could lead to a dialling back of some of the recent increase in duties on imports from China.
The UK / US trade agreement rolled out on Thursday was thin on detail, and only partially reversed the recent tariff hikes on many UK goods. Both sides were presenting it as a first stage in opening up trade between the two nations. Earlier in the week, a trade deal was announced between Britain and India. We expect the economic benefits from the agreements to emerge over the long-term. However, as mentioned above, we also believe the deals will have a positive impact on sentiment.
This week’s big economic news will be the Q1 UK GDP figures. Business surveys during Q1 pointed to a strengthening of activity in the services sector, particularly in February and March. Also, there have been reports of US firms placing overseas orders in March to obtain goods ahead of the application of higher tariffs in April. This may have boosted UK exports in Q1. So, we are forecasting GDP growth to rise to 0.5% q-on-q in the first quarter.
Also, several Bank of England MPC members are giving speeches this week which the markets will be monitoring for clues on the outlook for interest rates.
Investment Focus –UK Housing Market
House price growth slowed in April to 3.4% y-on-y, down from 3.9% in March, according to Nationwide. This slight softening is in line with expectations following the end of the SDLT holiday in March, which will have caused buyers to bring forward activity. Looking forward, last week’s rate cut will be supportive for the housing market. Interest rates and the cost of mortgage finance will be the key driver for the market this year, although if they fall quicker than expected partly due to a weaker economy then house prices may not rise much faster.
This week's figures
TUESDAY 13 May
UK Unemployment Rate, March
4.4% previous
4.5% forecast
Higher taxes and the hike in the minimum wage is causing some firms to cut back on recruitment, so we believe the unemployment rate probably increased slightly in March.
TUESDAY 13 May
ZEW Euro Area Economic Sentiment, May
-18.5 previous
-5 forecast
Sentiment in the Eurozone deteriorated sharply last month on the announcement of US tariffs. However, we suspect signs the White House is now willing to negotiate trade deals will have reduced the level of negativity.
THUSDAY 15 May
UK GDP Growth, q-on-q, Q1
0.1% previous
0.5% forecast
Survey evidence suggests that growth held up well in the first three months of the year, particularly on the services side ofthe economy. Consequently, we are forecasting a recovery for UK GDP growth in Q1.
