Only a few weeks ago it seemed as though the Bank of England was on the verge of an interest rate rise. There seemed little or no appetite for an interest rate reduction but things have changed dramatically since Boris Johnson came to office. Amid the threat of a no deal Brexit, sterling has taken a hit on the money markets and many believe there is further downside to come. So, how will this impact the UK property market and should we really be expecting a cut in base rates towards the end of the year?
Interest rate uncertainty
Whether interest rates fall further in December is debatable but at this moment in time there seems little or no chance of a rise in interest rates in the short to medium term. The UK government seems determined to pursue a no deal Brexit even if this just turns out to be a risky negotiating stance. As a consequence, interest rates on the money markets are starting to soften which is catching the attention of homeowners looking to refinance their properties.
Support for UK property market
There are two things to consider here, the ongoing demise of sterling against the likes of the dollar and the euro as well as low interest rates. Low interest rates will help to support the UK market and also encourage refinancing. The current rate of sterling has caught the attention of many foreign investors who appear to be taking at least some of the slack in the London market. So, at this moment in time the short to medium term prospects for the UK property market seem encouraging.
It is also worth mentioning that some experts believe inflation will strengthen in the short to medium term. Traditionally the government would increase interest rates to make finance more expensive, and cut inflation off at the head, but this is not possible just now. A stronger rate of inflation will help those with private rental properties where their rental income is often linked to inflation.
When will interest rates return to normal?
Many countries around the world have become accustomed to historically low interest rates after the 2007/8 demise of the US sub-prime market. At this moment in time it is impossible to say when base rates will return to “normal” because who would have thought a decade later, base rates may actually be heading lower in the short term. There are so many technical issues which will hold back a return to more traditional interest rate levels because let’s not forget this is uncharted territory.
UK economy
While there has been some concern about some companies holding back investment, and even disinvestment, ahead of the Brexit outcome, the UK economy is still one of the strongest in Europe. Germany is on the verge of recession which many believe will prompt the German authorities to soften their approach to Brexit. The UK government is demanding that the backstop is removed from the withdrawal agreement but EU leaders are adamant it will not be reopened.
Conclusion
At this moment in time the odds are stacked in favour of a reduction in UK base rates in December 2019. This would probably take UK base rates down to 0.5% and prompt a readjustment of mortgage rates in the UK marketplace. The reality is that investors and money markets are “getting used to” current rates and the traditional levels of years gone by seem light years away. However, as we touched on above, the only potential fly in the ointment is a stronger rate of inflation which could hold back economic growth.