Bank of England on Course for Interest Rate Cut

Interest rates continue to be a focal point of discussion for economic analysts and politicians. Given that interest rates have remained frozen at a sixteen-year high of 5.25 per cent since August 2023, there remains considerable speculation concerning the date at which interest rates will be lowered.

Fuel was added with the latest comments from Ben Broadbent, Deputy Governor for Monetary Policy at the Bank of England, stating that interest rates could be lowered ‘some time over the summer.’

Fortunately, with the UK experiencing the fastest economic growth in over two years, which has ended the recession period characterising the previous two quarters, we are entering a promising period where the prospect of cutting interest rates is imminent. This will have a significant impact on the property market, for the easing of interest rates will incentivise increased consumer participation, as well as alleviating the financial stress for pre-existing mortgage holders. 

In turn, let’s look at the general economic performance and evaluate when to expect a fall in interest rates.

How is the Economy Performing?

The latest Office of National Statistics data offers a positive snapshot of the uptick in the national economy. Gross Domestic Product grew by 0.6 per cent between January 2024 to March 2024. A closer look reveals that the main contributors to this are services increasing by 0.7 per cent and production by 0.8 per cent. Even with construction falling by 0.9 per cent, the data underscores the vibrancy under which the UK economy is undergoing – so much so that the International Monetary Fund has described the UK as arriving at a ‘soft landing’.

Jeremy Hunt, the Chancellor of the Exchequer, has welcomed this assessment as good news, emphasising that this ‘clearly shows that independent international economists agree that the UK economy has turned a corner.’ Further evidence can be pointed to the FTSE 100 stock index rising to a record opening high and the UK pound increasing against the dollar to trade at over $1.25.

These measurements indicate that the UK is on track to a healthy economic recovery following the economic hardship of the COVID-19 Pandemic and the War in Ukraine. Such an economic landscape has paved the way for renewed optimism in the UK housing market, with James Sproule, the UK Chief Economist at Handelsbanken, providing the following commentary:

‘The adjustments to capital valuations, often masked by inflation, as well as increases to rents, have resulted in property once again delivering a premium over gilt yields – and opened up the potential for attractive opportunities as the economic recovery progresses’.

When to Expect Interest Rates to Fall?

Of crucial importance is the ongoing discussion of inflation, a central issue underpinning the present rate of interest rates by the Bank of England. Against its highest rate at 11.1 per cent in October 2022, the most recent data reveals that inflation rates have fallen to 2.3 per cent in April 2024. Although falling short of Capital Economics forecast of 1.9 per cent and the Bank of England’s target of 2 per cent, it is nevertheless the lowest inflation level in over three years, along with the steepest decline in disinflation from its peak in nearly fifty years.

Emerging from this data concerns the date at which the nine Bank of England committee members will vote on whether to lower interest rates. Two dates in particular form the parameters of discussion among industry experts: 20 June and 1 August. Before the inflation data for April was revealed, Michael Sandors, a senior Oxford economics adviser, commented that ‘we expect the BoE’s monetary policy committee will cut rates soon, with a narrowly balanced choice between June and August for the first cut and rates falling by 75bps (basis points) by year end.’

Yet given that interests did not meet the 2 per cent target set by the Bank of England, Paula Bejarano Carbo, an economist at the NISER think tank, argues that it’s likelier to happen in August in order to ensure that economic conditions remain steady and durable. Despite this potential setback, confidence is being exercised based on interest rates falling in the near future, with 62.5 per cent of property investors looking to expand their portfolios over the next year.

What to Expect Soon?

Considering the productive state of the economy based on the current measurements, it is clear we are approaching the point where interest rates will be lowered. No longer is it an elusive prospect that is charming us from an unattainable distance. We are itching closer to interest rate cuts as we enter the summer period, a season offering an exciting opportunity for property investment.

Accordingly, the next few months are shaping up to be eventful for landlords and homebuyers to remain up to date, with the imminent cut in interest rates having a significant impact on the vitality of the property market.