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On Thursday 18th September, the Bank of England (BoE) held its key Bank Rate at 4%, in a move that many had anticipated.
The Monetary Policy Committee (MPC) voted 7-2 in favour of maintaining this rate and decided to slow the pace of quantitative tightening (QT), scaling back the planned reduction in its bond holdings over the next year.
Here’s what the numbers are, why the BoE acted as it did, and what property stakeholders should be watching.
- Inflation in the UK stands at 3.8% year-on-year (CPI for August), nearly double the BoE’s target of 2%.
- The MPC also expects inflation to tick up slightly in September before beginning a gradual decline towards the 2% target.
- While price inflation remains stubborn, there are some signs of easing pressures: wage growth has moderated somewhat, though it remains elevated. The labour market is showing early signs of softening.
- On enforcing its policy tools, the BoE has decided to reduce its stock of UK government bonds held for monetary policy purposes by £70 billion over the next 12 months, down from the previous £100 billion target. This slowdown in QT reflects concerns over gilt market stability and borrowing costs.
But what does this mean for you:
- Mortgage Costs are Likely to Stay Elevated for a While
Because the base rate is staying at 4%, variable and tracker mortgage rates remain relatively high. Even fixed-rate mortgages (particularly short to medium term) will price in the risk of future rate movements and inflation. Buyers will need to factor in that borrowing won’t get much cheaper quickly.
- Transaction Costs / Carrying Costs Remain Pressured
Higher interest rates feed into the cost of financing development, refurbishment, and maintaining properties. For landlords, this increases the cost of debt servicing. For buyers taking out large mortgages, interest costs will represent a more significant portion of monthly outgoings.
- Inflation & Construction Costs
Persistent inflation, particularly in services, food, and materials, can push up construction and maintenance costs. Projects may see budget overruns. Increases in labour, materials, and logistical costs often lag but can bite as inflation expectations remain elevated. This may slow down development or require more conservative budgeting.
- Investor Behaviour and Yield Considerations
With interest rates staying higher, investors may demand better yield margins from property to compensate. That could mean higher rental growth required for investments to be attractive, or pressure to reduce purchase prices to maintain yield. Some investors may shift toward lower risk, shorter term assets if they perceive property as having more risk under persistent inflation.
- Affordability & Buyer Demand
As borrowing remains expensive and inflation eats into household disposable incomes, buyer demand could soften, especially in mid-price and first-time buyer segments. There may be delays or cancellations in purchasing as potential buyers reassess affordability. Regions or types of property with lower price points or where buyers are more sensitive to rates might be hit first.
- Property Valuations: Caution Warranted
Valuations often lag market shifts. As downward pressures from lower demand and rising costs build, appraisers may become more cautious. Expectations of future income (rents) and capital growth will be affected by inflation, rate expectations, and economic growth.
The BoE’s decision this week to hold interest rates at 4% reflects its concern that inflation remains too far above its target. For the property sector, that means cost pressures, affordability challenges, and caution in expectations of price growth. However, there are signs that certain inflation drivers are moderating, and with careful strategy, property professionals can navigate this period well.
At epg. we can help you navigate the market and understand what it means for your portfolio. To book a complimentary portfolio review, contact us here.
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