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Property industry welcomes 'sensible move' to cut UK interest rates

Bank of England lowers rates to 4.75% but marks impact of Reeves' Autumn Budget
Andrew Bailey, governor of the Bank of England. (Jason Alden/Bloomberg via Getty Images)
Andrew Bailey, governor of the Bank of England. (Jason Alden/Bloomberg via Getty Images)
CoStar News
November 7, 2024 | 2:38 P.M.

The Bank of England has cut interest rates to 4.75% in just the second reduction in more than four years.

The cut represents a fall of 0.25 percentage points from the previous 5% Bank Rate, set in August. Economists had largely predicted a reduction, with this afternoon's confirmation being called a "sensible move" by one property investment expert.

Andrew Bailey, the governor of the BoE, has warned that rates could, however, fall more slowly than anticipated after the Chancellor's Autumn Budget last week, which is expected to increase inflation.

At its meeting on Wednesday, the Monetary Policy Committee voted by a majority of eight to one to reduce the Bank Rate. The only member to vote against a cut preferred to maintain the rate at 5%.

Bosses at the BoE explained that their decision to back a rate cut was influenced by "continued progress in disinflation" as "previous external shocks" having abated.

Today's decision has seen the pound strengthen against the dollar, with Sterling increasing by 0.4% to 1.293, and rising by 0.2% against the euro at 1.202.

The BoE said in a statement: "The combined effects of the measures announced in Autumn Budget 2024 are provisionally expected to boost the level of GDP by around 0.75% at their peak in a year’s time, relative to the August projections.

"The Budget is provisionally expected to boost CPI inflation by just under 0.5 of a percentage point at the peak, reflecting both the indirect effects of the smaller margin of excess supply and direct impacts from the Budget measures."

Analysts explain that the Autumn Budget contained some potentially inflationary measures, like the rise in the minimum wage and plans for £100 billion of public sector investment.

Bailey added at a press conference in London this afternoon: "Yes there is some upward affect on inflation, but the path of inflation that we have set out we think returns to the [2%] target by the horizon that we look at, and that has given us in a sense support for cutting rates today.

"There is a lot that we will learn about the effects of the budget as they pass through. I think it's important that we have time to do that."

A second cut to interest rates in more than four years will come as good news to the property industry, with rates influencing the cost of borrowing for investment and development projects. But many will be keen to see if rates drop more slowly than previously predicted.

Meenal Devani, chief investment officer at Aprirose, said in a statement: "The cut in interest rates that we have seen today is a sensible move by the Bank of England. It’s clear that the high inflation that we experienced twelve months ago was very much the effect of supply side constraints coming out of COVID and a surge in energy prices.

"The unprecedented jump in interest rates has had a stranglehold on investment, and therefore long term productivity and employment, with businesses unable to invest because the cost of financing has been so high and private sector financing being crowded out by gilts."

She added: "Continued downward momentum in interest rates will also have a positive impact on real estate transaction volumes. The BoE will, of course, need to continue to evaluate employment and inflation data closely to determine how much and how fast they can continue to cut rates. The recent budget remains a concern in this regard, given its focus on increased spending."

UK Chancellor Rachel Reeves responded to the rates cut on X, formerly Twitter, saying she was "under no illusions" about the state of the economy, but did not comment on the BoE's forecasts around rates dropping more slowly after her Budget announcement last Wednesday.

She wrote: "The interest rate cut will be welcome news for millions of families, but I am under no illusion about the scale of the challenge facing households after the Conservatives’ mini-budget. That’s why we are taking the long term decisions to fix the foundations and deliver change."

The BoE's decision on interest rates also comes a day after Donald Trump declared victory in the United States general election, with the pound dropping against the dollar on Wednesday following the result.

Trump has indicated that he will increase tariffs on goods imported from around the globe, which some economists say could spark an international trade war.

Asked the impact the United States election result could have on the United Kingdom economy, Bailey said: "We always respond to announced policies...not to stories about what they might be."

He said they work with all United States administrations: "We do it without any presumptions and we will do that constructively."

James Roberts, director of market intelligence at Avison Young, said in a statement: "Global investors will be closely monitoring events in the US regarding the impact of the upcoming Trump administration’s economic and trade policies.

"Some analysts are forecasting the proposed higher tariffs on foreign goods will push up inflation in America, leading to a slower decline for US Federal Reserve interest rates."

(Updated on 8 November to add comment from Avison Young.)

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