Bank Rate stays on hold and may stay that way all year
The Bank of England Monetary Policy Committee (MPC) left interest rates unchanged at 3.75% on Thursday, in the face of a rapidly changing global economic backdrop. For central banks, if you do not know what is coming next, it is best to do nothing while events play out, and that is exactly what the MPC is doing now. The Fed also left its policy rate unchanged on Wednesday.
Just a week ago, the ECB hiked interest rates by 25 bps in the face of rising inflation, a high oil price and the heightened geo-political uncertainty. It seemed only a matter of ‘when’ not ‘if’ other major central banks followed suit. However, the peace agreement signed on Wednesday has been a game changer, causing energy prices to slide and shifting expectations on how high inflation will go. There was also the plot twist of UK inflation remaining steady at 2.8% in May, defying expectations of a rise, which is lower than the USA at 4.2% and the Eurozone at 3.2%. Now the idea that the Base Rate might rise at all in 2026 is in doubt, in our opinion.
Certainly, the split in Thursday’s Base Rate vote – seven for unchanged, two favouring a 25 bps rise – shows there is a clear majority for a wait-and-see approach, and that hawks are a small minority on the MPC.
In the accompanying press statement, the committee noted that market interest rates were elevated compared to pre-war levels. So, the financial markets have already done the job of making borrowing more expensive, reducing the need for the MPC to hike the Base Rate.
Much now depends on whether the peace deal between the US and Iran holds, thus normalising supply chains. The MPC tends to focus on where it thinks inflation and the economy will be a year from now. So, while inflation might briefly edge higher in the next few months (as petrol prices tend to only gradually decline after oil shocks), a successful peace deal will probably mean inflation is lower in June 2027 compared to now. Consequently, a peace deal that holds will shrink the likelihood of a rate hike in 2026.
We suspect President Trump does want this peace to succeed, as the USA holds Midterm elections this November. The entire House of Representatives and a third of the Senate are up for re-election. The Republicans are trailing in the polls and so the White House will want to reduce cost of living pressures on voters. However, that comes with the caveat that Middle East diplomacy is notoriously volatile.
Turning to the implications for the property market, if we assume the peace does hold, stable interest rates would provide a firm basis for trading. While the real estate world likes interest rate cuts, no change in borrowing costs does provide certainty when pricing loans, creating a platform for increased lending. Moreover, investor confidence is likely to strengthen now, thanks to the fall in geo-political risks and the improvement in the economic outlook.
To set against these positive points, it should be remembered that the property market tends to go quiet in July and August as investors, bankers and agents take holidays. There is also the Westminster political drama of the Prime Minister’s future still to play out.
Consequently, we are predicting a stronger than usual ‘return to school’ rebound for the property market this September, thanks to reduced geo-political risk and an upwards revision for the economic outlook. Given the return of capital to market is likely to be cautious at first, there will probably be a preference for prime stock in core locations initially. We see city centre offices and data centres drawing interest given the strength of the technology sector at present. The prospect of lower inflation bolstering household finances should also be good news for the residential market.
