MPC cuts Base Rate to 3.75%, in ‘Keep calm, and carry on’ decision
The Bank of England’s Monetary Policy Committee (MPC) has followed the lead of the US Federal Reserve last week and cut interest rates by 25 bps. However, it was a surprisingly close vote – five in favour vs four against, with the Governor, Andrew Bailey, exercising his casting vote. It is interesting to note that despite a run of disappointing news on the UK economy in recent weeks, the MPC does not appear spooked. The tone of its press statement that accompanied the decision, and thus its message to the financial markets and households, was decidedly ‘Keep calm, and carry on’.
Earlier in the week, labour market statistics showed the UK unemployment rate increased to 5.1% in October, up from 4.3% a year earlier. The latest GDP figures reported the economy contracted on a month-on-month basis in October by -0.1%, having similarly declined by -0.1% in September. Meanwhile, inflation saw a sharp deceleration, easing from 3.6% in October to 3.2% in November, which was lower than the 3.5% the City was predicting. In response to this abrupt slowdown in prices, the Bank of England is now forecasting inflation to return to the 2.0% target in Q2 2026. Previously, it was predicting this would happen in 2027.
All the above should be more than enough justification for a 25 bps Base Rate cut. However, instead it was a close vote from the MPC. Also, the Bank’s accompanying statement mentions returning to the neutral rate (where the Base Rate neither slows nor boosts the economy), with no mention of providing the stimulus one would normally expect during a difficult time for the economy. The MPC appears unperturbed by the downbeat economic news, in marked contrast to some of the ringing of alarm bells by some pundits.
In part, the MPC are taking comfort from the wide range of indicators pointing to inflationary pressures easing. Indeed, last week saw an article in the Financial Times reporting that analysts are predicting a surplus of oil will hit the market next year, which should mean lower petrol prices. The Bank also estimates that measures in the Autumn Budget, like freezing rail fares in England, could reduce inflation by 0.5% in 2026. The GDP figures are ‘real’, i.e. adjusted for inflation, so as inflation declines, the bar the economy must clear to achieve ‘real GDP growth’ gets lower. Arguably, the MPC can do nothing and allow slowing inflation to restore the GDP figures to healthy growth again. That may explain why some rate setters are in no hurry to cut interest rates.
Also, the MPC, in our opinion, is taking the view that in part the economic slowdown reflects firms and consumers having been in ‘wait-and-see’ mode ahead of November’s Budget, and the time to worry about growth would be if spending and investment doesn’t revive post-Budget. On that score we have seen an encouraging sign with the widely quoted PMI business activity index, whose provisional reading for December was 52.1, up from 51.2 in November. A reading of over 50.0 for the index points to growth for the commercial side of the economy.
The MPC has hinted that more rate cuts are probably in the pipeline, but these will be to fine tune the Base Rate to establish it at the neutral level, not to try and revive a flagging economy. Rate setters do not appear to think things are that bad, or likely to reach that situation. Indeed, some of the doom-mongering on the economy is clearly overdone. The current unemployment rate at 5.1% is higher than a year ago, but compared to its previous peaks of 8.5% during the GFC recession and 10.7% in the early 1990s downturn, it does not look worryingly high. Between 1976 and 2000, the UK unemployment rate was always higher than 5.0%.
Turning to the property sector, there has been anecdotal evidence of a post-Budget willingness among some to invest and move schemes forward, although it is early days, and the key test will be if this new momentum continues in the new year. These anecdotes often relate to London, but we believe December’s interest rate cut improves the chances of this positivity transferring to the regions in the coming months. It is also interesting that the office market appears to be a focus of these post-Budget green shoots, suggesting investors are now viewing offices as an area of opportunity.
We need to see the December uptick in the PMI index replicated in other business surveys and data, plus continue over subsequent months, before anything more than cautious optimism is justified. However, the ‘Keep calm, and carry on’ posters were printed in 1940 in preparation for an invasion that never happened, and there is a growing possibility that 2026 could be the year property investors conclude the worst-case scenario is not going to materialize and invest accordingly.
