UK: The Bank of England has announced that it will cut interest rates from a 16-year high of 5.25 per cent to five per cent, marking the first rate drop since the onset of the Covid-19 pandemic in March 2020.
The Bank’s nine-member committee voted by a majority of five to four to cut the rate, as a result of slightly easing inflationary pressures, although governor Andrew Bailey has urged caution about reducing rates “too quickly or by too much” in the coming months. It suggests that the announcement is unlikely to trigger consecutive series of cuts this year.
In addition, the Bank of England forecasts that inflation will rise to around 2.75 per cent later this year, before returning to its two per cent target in 2025. In the service sector, including the hospitality verticals, inflation and wage settlements remain high, but both are beginning to ease.
The property industry had been optimistic about a cut to interest rates to boost the housing market, while major lenders including NatWest, Halifax and Santander all cut their mortgage rates in anticipation of the announcement.
Rachel Reeves, the new Chancellor of the Exchequer, added that she would support a reduction in the base interest rate.
Reaction from the domestic hospitality sector includes:
Allen Simpson, deputy chief executive of UKHospitality, the leading trade body for hospitality [pubs, bars, restaurants, hotels, indoor leisure and contract catering] said: “I hope this will provide some relief for businesses that are continuing to pay back Covid loans, and encourage consumers to spend.
“Now is the time to press the accelerator on growth. We need to see interest rates continue to fall, and for the government to urgently implement its promised reforms to business rates.
“Combined, this will see a meaningful and much-needed boost for hospitality businesses,” he added.
Ben Nichols, interim managing director at RAW Capital Partners, said: “The Bank of England clearly feel as though the perils of high inflation have been addressed by their action on interest rates and the rate hiking cycle has finally come to an end, allowing homebuyers, investors and BTL landlords alike to take a breath and plan their strategies with greater confidence and freedom. After rates reached their highest level in 16 years, today’s decision will provide much-needed relief, and I expect to see an uptick in activity in the UK property market as a result.
“Recently, sellers have flocked to put their properties on the market, and estate agents have noted an increase in buyer demand. What’s more, official figures show that house prices have grown for three consecutive months, while mortgage approvals have held steady near their highest level in 18 months.
“This indicates that the market was stabilising well before today’s rate cut. In this context, the additional impetus from the MPC today is likely to encourage hesitant investors and buyers to resume their investment plans.
“However, while we can celebrate a rate cut after two years of hikes and pauses, it is important to remember that rates are still very high in comparison to where they have been in recent memory. For a surge in activity to materialise, brokers and their clients must be equipped with the tools they need to confidently execute their investment plans.
“Lenders must recommit to offering a wide range of bespoke and flexible financial products to support the property market’s continued recovery,” he added.
David Hannah, group chairman of Cornerstone Tax, said: “Today’s news from the Bank of England marks a positive step in the right direction.
“The monetary policy committee has recognised that a relentlessly hawkish approach has its harsh limits. Since their consecutive decisions to raise the interest rate to 5.25 per cent, we’ve witnessed chaos in the mortgage market, dismantling the ambitions of first-time buyers.
“Additionally, a record number of landlords have exited the private rental sector, contributing to higher prices for tenants who once aspired to take their first step on the property ladder.
“I’d urge the MPC to continue this momentum by considering another interest rate cut in their next meeting, even a reduction by a quarter percentage point would signal further optimism within the UK economy. A target base rate of three to 3.5 per cent should be the overall goal if the BoE want to truly prioritise prospective buyers,” he added.
Jatin Ondhia, CEO of Shojin Property Partners, said: “The consecutive months of target level inflation were clearly enough for the Bank of England to finally give the green light to reduce interest rates. The decision is a key indicator of the growing sense of economic stability and will likely open up new opportunities for investors as they reassess how to manage their portfolios.
“The impact of the high inflationary-high interest environment of the last couple of years cannot be underestimated. Homeowners have faced higher mortgage rates than at any point since the financial crisis, while developers have found it harder to access much-needed finance. Today’s decision hopefully signals a clear transition away from this challenging period.
“Looking ahead, alternative investments are likely to play an increasingly important role in investors’ portfolios. While the base rate has now fallen, it’s from a 16-year high – interest rates still remain significantly above the levels that many landlords had become accustomed to before the hikes.
“As such, diversification will remain a prominent trend going forward, with a balance of savings products and lower-risk investments alongside higher-risk opportunities to provide potential for greater growth,” added Ondhia.
