As I am sure you have heard, the Bank of England has finally broken its seven-year record and cut its base rate to 0.25% in response to economic uncertainty caused by the EU referendum result.
The Bank has been hinting that it was going to cut rates for some time, so this move will not be a huge surprise to the markets.
Over the past year, the feeling was that the first move in rates would be upwards, so this highlights how much can change in such a short time.
The package of policy made by the MPC consists of:
• A cut in Bank Rate from 0.5% to 0.25%
• New gilt purchases of potentially up to £100bn
• Corporate bond purchases of £10bn
• And a new Term Funding scheme to provide cheap funds to banks
Together, these measures should meet or even exceed market expectations after July’s let-down, however, it has been suggested that a policy loosening will have no impact on the economy and could even adversely affect confidence. But the Committee clearly decided otherwise, with all members voting for the rate cut.
These measures send a strong signal that the MPC is prepared to look through the inflationary consequences of the post-referendum drop in the pound and to focus instead on supporting sentiment and activity.
If we look ahead over the next two years, the MPC’s new forecasts included in the August Inflation Report show a big downgrade to GDP growth in 2017 from +2.3% to +0.8% but a recovery to +1.8% in 2018. Inflation is expected to be above the 2% target at the normal two-year time horizon but in the current highly uncertain environment, these forecasts are not a highly useful guide to future policy changes. If the economy continues to lose strength, the MPC will come under pressure to act again.
So, what could these changes mean for landlords and their investment in the London property market? Since Brexit, market reports have indicated London property currently remains stable particularly as the market is currently driven by demand from overseas property buyers, and these buyers will be an indirect beneficiary of today’s cut. Interest rate cuts have in the distant past triggered a fall in the value of the Pound – already battered since the Brexit vote – making UK property prices appear better value.
Mortgage borrowers should check if they have a variable rate deal directly linked to the base rate. Only these homeowners are guaranteed to feel the effect of today’s rate cut on their mortgage payments at the end of the month.
We feel that the rate reduction will encourage people to spend and not save, therefore boosting the economy even further. People with tracker mortgages will benefit and people who are renewing their mortgage may see a change in interest rates.
The rate cut is unwelcome news for holders of cash, while investors in gilts and corporate bonds have received a boost. The measures are broadly supportive of markets, which will benefit pro-risk positioning in client portfolios. This adds to the challenge for investors seeking income who will need to take on some additional risk in the search for alternative sources of return to gilts.
We believe that assets such as corporate debt and dividend-paying equities will, alongside UK commercial property, fill most of the gap. In the meantime, the MPC’s actions will continue to support a positive environment for equities and help maintain economic stability.
This can only be good news for investors.
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