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UK Interest Rates Increase on Economic Growth

The Bank of England raised interest rates for the second time in under a year. What does this signal and how will it affect the UK housing market?

The Bank of England (BOE) has raised interest rates to 0.75%.

The hike was the second since the 2008 financial crisis. Last November it rose to 0.5% from 0.25%, the first time in almost a decade.

The BOE Monetary Policy Committee, which decides interest rates, voted unanimously for an increase in rates following positive economic growth and an encouraging labour market.

BOE Governor Mark Carney told reporters that economic growth rebounded in the second quarter, after a slight slowdown at the start of the year.

The bank’s forecasts show that consumer price rises could reach 2.2% in 2019 and 2.1% in 2020.

The BOE is likely to increase rates further if its forecasts prove right. Any future rise in rates, however, is likely to be at a gradual pace and to a limited extent.

This points to continued stability in the real estate market.

Andrew Burrell, JLL EMEA Head of Forecasting, says: “The (rate) rise has been largely priced in and is not expected to have major impact on real estate markets.” He observes that there will be more pressure on yields from market rates eventually.

Despite the rate hike, returns from real estate continue to remain attractive when compared to other asset classes.

Working in favour of the UK real estate market is the employment rate and stable consumer confidence, as well as the OECD predictions of global GDP growth at 3.8% for this year.

Sterling set to rise?

The falling pound dropped to its lowest level against the euro in nearly a year last week on 9 Aug, but edged higher against the Euro to 1.12 this week (as of 16 Aug).

Sterling’s fall against the Euro and the Dollar (Source: BBC)

Stabilization of the pound could be due to the rate hike, which usually pushes up its value, and news reports detailing the potential for a concession being put on the table by the EU in the ongoing round of Brexit negotiations.

Some member states are reportedly ready to allow Britain to remain in the single market for goods while opting out of the free movement of persons. The trade-off is that the UK replicates all new EU environmental, social and customs rules in addition to those set out in Theresa May’s Chequers proposal.

This marks the first major divergence between the European Council, which is made up of leaders from member states and the European Commission. The concessions will be discussed at a meeting of leaders from both sides in Salzburg this September.

The currently weak pound provides foreign investors with a window of opportunity to buy into UK property and obtain good returns.

Jeremy Stretch, head of FX strategy at Canadian Imperial Bank of Commerce said the pound typically underperformed during the August holiday period. CIBC had tracked the pound’s performance on a monthly basis over the last 15 years.

Following this trend, foreign investors who are interested in UK property may want to consider entering the market now before the pound starts to rise again.

By Ian Choong
Edited by Vivienne Pal 

Sources:

 

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