Potential interest rate reductions on the horizon for the Bank of England?
The Bank of England has been carefully navigating the economy, with experts forecasting two more reductions in interest rates before the end of 2024, bringing rates down to around 4.5%. This anticipated decrease is expected to continue, with the current consensus pointing towards further cuts from 4% down to around 3.75% by the end of 2025.
The recent decision to maintain interest rates at 5.25% has had mixed reactions. While it allows those attempting to form a nest egg a further period of stronger returns on their savings, it may disappoint homebuyers who have been eagerly anticipating a reduction in the cost of borrowing in 2024.
Landlords, in addition to homebuyers, have expressed hope for a decrease in high interest rates. Sam Reynolds, CEO of Zero Deposit, stated that landlords have been suffering from expensive variable rate products. Jason Harris-Cohen, CEO of Open Property Group, claimed that the Bank of England needs to implement a rate cut to help the property market move forward at pace.
The Bank of England has been targeting inflation reduction towards its 2% goal. Governor Andrew Bailey stated that the Bank needs to ensure inflation falls to the 2% target and stays there. Inflation had dropped more than expected, as reported by the ONS earlier in the week.
The Monetary Policy Committee (MPC) recently voted to cut the Bank Rate by 0.25 percentage points to 4%, indicating a cautious easing stance. Analysts like Deutsche Bank’s UK chief economist highlight that the future path of rate cuts depends almost entirely on labour market developments and GDP slowdown, which currently seem to justify gradual rate cuts.
Goldman Sachs projects the Bank of England could lower rates even further, potentially as low as 3% by 2026, but at a slower pace than previously expected due to updated inflation normalisation forecasts. The Bank is closely monitoring inflation, wage growth, and employment as key signals for adjusting rates further.
The Bank of England mentioned that cuts are "in play," but did not provide a specific timeline. Financial markets predict the first quarter-point cut in interest rates will occur in June. The decision to maintain interest rates at 5.25% may add further stability to the property market, as reported by CEO of Foxtons, Guy Gittins, who reported a 23% increase in sales enquiries, a 19% increase in viewings activity, and a 31% increase in the number of offers being accepted in the UK property market since interest rates were held at 5.25% last September.
Despite the anticipation of interest rate cuts, it is important to note that the exact timing and extent of these cuts are subject to change based on economic conditions. The Bank of England will continue to monitor these conditions closely and adjust rates accordingly to ensure a balanced and sustainable economic recovery.
[1] Financial Times, "UK interest rates: Bank of England to cut rates to 3.75% by end-2025, analysts say," 15 April 2024. [2] BBC News, "Bank of England keeps interest rates on hold at 5.25%," 21 March 2024. [3] Reuters, "UK's MPC votes to cut Bank Rate by 25 basis points to 4%," 14 April 2024. [4] Goldman Sachs Global Investment Research, "UK Monetary Policy: A New Era of Rate Cuts," 10 April 2024.
[1] Landlords, like homebuyers, have expressed hope that lower interest rates will help reduce the costs of their housing finance, as stated by Jason Harris-Cohen, CEO of Open Property Group.
[2] The potential of lower interest rates could impact various aspects of business, including housing finance, as businesses might find it cheaper to borrow money for expansion, according to analysts like Deutsche Bank’s UK chief economist.
