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Sound The Klaxons! The Rates Have Been Cut…Finally

Adam Lawrence, Property entrepreneur and co-founder of Partners in Property, comments

It’s been many a long year since a rate cut without, frankly, a panicked reason to have one. Some might say this one had to come because the Bank went too far in 2023 - I’d disagree. Many are still lamenting the fact that raising rates was the wrong reaction to the Covid disturbance to global supply chains and supply-related shocks - I’d argue, as I have done ever since it happened, that they are wrong. The point wasn’t to tackle the root cause of inflation - it never is. The point is to stop it running away (as it nearly did) and to put the brakes on an economy that never really had any pace in the first place, apart from being in a V-shaped recovery after the pandemic had mostly gone (or at least been contained by the vaccine).

I actually thought the Bank should have gone to 5.5% in September 2023, which was the last time the vote was only 5-4 in terms of what the Bank should do. This time, it was 5-4 to cut rather than 5-4 to hold (rather than raise). Ultimately, we’ve spent more time at 5.25% than we would have done (and/or we would have started our cutting cycle earlier) if we had raised rates in Sept ‘23 to where the terminal rate should have been. But we didn’t.

In many ways - how much does the Base Rate truly matter anyway? If you have mortgages linked to base - as many who are reading this will - the answer is, of course, quite a lot. If you are looking at new mortgages - whether in a limited company or not - the relevant rate to note is in fact the 2-year, or more likely the 5-year, Gilt yield. The 2-year is more impacted by the Base Rate (which is really the 3-month cost of money, or one-eighth of that time period) - the 5-year rate is much less influenced by it and has been trading under the 2-year for some time now (in what is known, technically, as a yield curve inversion).

That inversion has been flattening out, of late, in anticipation of this cut. For the first and likely only time, in this cycle, the entire 25bps cut in the short rate played out in both the 5-year gilt in the week of the meeting and also the 2-year gilt. Expect future cuts to cut the gilt rates a little less, but it seems this entire cut WILL play out in the mortgage markets.

I would also expect the market to overreact to the first cut, as many will now (incorrectly) be predicting or at least hoping for a flurry of cuts, whereas the Bank of England (and the 5-4 vote) will be looking at a definite hold in September and will be open-minded after that. 

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