The BoE's next move will be a cut, the Governor says
Making sense of the latest trends in property and economics from around the globe
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The Bank of England's decision to hold the base rate at 5.25% yesterday came with a reassuringly dull set of meeting minutes.
The Monetary Policy Committee voted 6-3 to hold. Two members favoured another hike to 5.5%, one voted to cut to 5%. That's the first three-way split since 2008.
It's perhaps surprising that two members still favour tightening policy, given the fact that time lags mean previous rate hikes are still working their way through the system. The two hawks linked their vote to the fact that household incomes had continued to edge up and forward-looking indicators of output had remained positive. Measures of wage growth have moderated, but remain at rates above those consistent with the inflation target.
BoE projections show the annual rate of inflation touching the 2% target in the second quarter before rising again through the final six months of the year due to higher than anticipated energy prices.
What next?
BoE Governor Andrew Bailey's post-decision interview with Sky was more revealing. Despite the various risks cited in the minutes, Mr Bailey confirmed for the first time that the next move was likely to be a cut. Markets have pencilled that in for June.
Mortgage rates are probably entering a sustained period of stability, at least by recent standards. Simon Gammon of Knight Frank Finance told the Evening Standard:
"We saw substantial falls in mortgage rates through December and the first two weeks of January, but reductions have slowed as margins have grown thin. Where lenders can't cut rates, we're seeing product innovation, like five year deals with no early repayment charges after two years, which allow borrowers to benefit from rate cuts within their term without incurring hefty fees.
"If the narrative turns again... we'd expect the lenders to resume reducing rates. Business levels were poor last year and the lenders are eager to make up ground while sentiment is improving so steadily."
Risks
The BoE picked out "developments in the Middle East and from disruption to shipping through the Red Sea," as the primary risks to global growth. Indeed, the S&P Global Manufacturing PMI showed that UK firms are now feeling the effects of the disruption.
Goods from APAC now take an extra 12-18 days to reach the UK. Manufacturers reported that supplier performance deteriorated for the first time in a year and to the greatest extent since November 2022. Costs are once more rising for "chemicals, electronics, energy, food stuffs, metals, packaging and timber."
The BoE (predictably) opted not to discuss the other risk we discussed on Monday: that promises of lavish spending results in another sell off of UK government bonds. Warnings from institutions including Blackrock and the International Monetary Fund appear to have reached Downing Street:
“It doesn’t look to me like we will have the same scope for cutting taxes in the spring Budget that we had in the Autumn Statement,” chancellor Jeremy Hunt said in comments reported by the FT. “I need to set people’s expectations about the scale of what I’m doing because people need to know that when a Conservative government cuts taxes we will do so in a responsible and sensible way.” Meanwhile, Labour yesterday also walked back its pledge to spend £28 billion on low carbon infrastructure.
Overheating
I talk a lot about the government's struggle to form a coherent strategy to sustainably heat the UK's housing stock. We spend less time thinking about the risks of overheating, but it's becoming a problem, according to an Environmental Audit Committee paper published this week.
More than 4.6 million English homes experience summertime overheating, according to Loughborough University research. Meanwhile, consultants Arup reckon that 90% of existing homes will overheat under a 2°C global warming scenario.
The UK does have "world leading" policy in place to mitigate overheating, experts tell the committee, but it only applies to new homes. These policies, known as 'Part O' of Building Regulations, should be expanded for refurbishment of existing properties, the committee suggests.
In other news...
UK carbon price falls to record low (FT), Hermes expands in Hong Kong (Bloomberg), and finally, inflation figures dash hopes for cut in eurozone interest rates (Times).