Bank of England interest rate decision creates opportunity for landlords
After much debate and speculation over several weeks, the Bank of England’s Monetary Policy Committee (MPC) has voted to hold the current UK Bank Rate at 0.25%.
The decision was determined by a vote of 6 to 2 (the June vote had been 5 to 3) with the Bank stating:
The MPC’s overall assessment of the outlook for inflation and activity in the August Inflation Report is broadly similar to that in May. In the MPC’s central forecast, GDP growth remains sluggish in the near term as the squeeze on households’ real incomes continues to weigh on consumption.
Growth then picks up to just above its reduced potential rate over the balance of the forecast period. Net trade and business investment firm up, and consumption growth recovers in line with modestly rising household incomes. Net trade is bolstered by strong global growth and the past depreciation of sterling. The combination of high rates of profitability, especially in the export sector, the low cost of capital and limited spare capacity supports investment by UK firms over the forecast period, offsetting the effect of continued uncertainties around Brexit.
The latest review maintains the ongoing allure of property as an investment model, with current returns potentially offering a higher yield over alternative banking investment sources more closely aligned to the Bank Rate.
In June of this year, in an article “Will interest rates rise?”, Andrew Turner, chief executive at Commercial Trust, urged the MPC to maintain the current interest rate:
At a time when the economy is fragile, the government is weak and there is a wealth of uncertainty over Brexit, I question why the MPC would increase interest rates, which would only cause further problems in moving towards any semblance of financial stability for the country.
It has been accepted by the Committee that inflation would continue to rise for some time yet, but the increase in wages expected by the Bank of England has not come to pass, and business investment is lacklustre at best. These amongst other reasons led the MPC to say that they would not impose a rise and I hope they keep to that original plan.
In May the Consumer Prices Index (CPI) sat at 2.9%, but was anticipated to rise to 3% in August. Contrary to this expectation inflation actually decreased to 2.6% in June, which may be a contributing factor to the MPC’s decision.
Following today’s meeting, the MPC has announced that it anticipates inflation reaching 3% by October, as the past depreciation of sterling continues to pass through to consumer prices.
From a landlord point of view – and in the context of interest rates on mortgages, certain parts of the mortgage lending industry have responded bullishly to today’s announcement.
Jeremy Duncombe, Director at Legal & General Mortgage Club stated:
These historic lows won’t last forever, particularly as inflation starts to creep upwards. Consumers should take the opportunity to get in touch with their adviser now, so that they can review their existing mortgage arrangements. Time is of the essence to secure a new deal, which could potentially save them thousands of pounds, before interest rates inevitably rise again.
This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.