UK interest rates: BoE sets the decks for August

The Bank of England’s June meeting was a non-event, which was no surprise given a cautious stance on macro data, as well as a forthcoming general election (any rate move could have attracted claims of political interference).

Its August meeting, however, is likely to be far more eventful. Markets expect a 25bps interest rate cut. Such a move will start rates on a downward journey which we expect to continue for 18 to 24 months. One question we’re often asked by global investors is ‘why now?’ 

Putting aside June’s meeting, there are good reasons for thinking the wait for a rate cut has been too long. The latest figures on the UK economy show inflation is now at its 2% target for the first time in three years, and unemployment – a lagging and much delayed indicator of activity – showed an uptick to 4.4% in the three months to April. Excluding the pandemic, this was a six-year high. 

When we consider that changes in monetary policy only affect the economy with a lag, there’s a good case for arguing that a move should have been made sooner, rather than risking an undershoot of the BoE’s inflation target and an overshoot of its desired contractionary effect on activity. 

If, or when, the BoE moves in August, it will join a growing list of central banks loosening monetary policy. Those of the Czech Republic and Hungary moved last year, the Swiss and the Swedes moved in March and May respectively, and both the Bank of Canada and ECB took action at the start of June. It’s still not certain whether the Federal Reserve will make a move this year due to the strength of the US economy – though this is subject to feverish speculation.

We’ve been saying for some time that 2024 is the first year of a new real estate cycle. By this, we mean that we’ll see property valuations bottoming out and starting to rise again, investment transaction volumes reach their nadir and then start to climb, and occupier take-up resume an upward trajectory.

Falling policy rates support this narrative, though a single cut is but one step in the dance. On its own, it may lead to slightly lower debt and refinancing costs, but its indication of direction is more significant. Knowing that rates will fall in the next few years will make planning easier, underwriting simpler, and add the prospect of falling property yields (and thus rising capital values) to investment cases.

The start of the real estate recovery will continue to take shape this year as uncertainty shifts to how many cuts will come, not whether they will materialise at all. On this the debate rages. Even here at JLL, my colleague, Adam Challis, Head of UK Research & Strategy and I, go back and forth over where rates will be by the time he refinances his own mortgage!