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Will the Held Interest Rate Change the UK Property Market?

The Bank of England (BoE) announced their decision to hold the interest rate for the fifth consecutive time this week.

The current rate of 5.25% is the highest it has been for nearly 16 years, and it has been held at this level since August 2023. Previous to that, there was a run of 14 increases.

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By keeping the interest rate high, the BoE hopes to curb inflation, which is why they have been cautious about cutting rates despite the potential negative economic impact. Inflation has been falling since it peaked in October 2022 and now stands at 3.4%. However, this is still a way off the Bank’s target of 2%.

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Keeping an eye on these economic announcements is vital in all investment property strategies, and those in the property industry have been keenly tracking the changes in rates and sentiment to help them make their current investment decisions.

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Source: RWinvest

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Economy on red alert with yield curve close to inversion

The yield curve has been a reliable predictor of US recessions over the last four decades, less so in the UK. With only one exception, each time the yield curve has inverted, the US economy has entered a downturn within 18 months.

What is the yield curve?
The yield curve is the difference between the interest rate on a longer-dated bond (debt issued by a corporation or country) and a shorter-dated bond.

For instance, typically it should cost less to borrow money for two years than for 10 years. This is because the economy is expected to grow over time and experience inflation. A healthy yield curve should therefore slope upwards.

What happens when it doesn’t?

When it costs more to borrow money in the short term than it does in the long term, the yield curve inverts or slopes downwards.

At best, an inversion suggests that investors expect the economy to slow, at worst it signals a recession could be on the way.

Why does the yield curve matter?
Keith Wade, Chief Economist said: “The curve is moving around at the moment, but we are close to if not inverted in both the US and UK.

“The US curve is a reliable indicator of recession, the UK curve less so.

“Nonetheless, if the US goes into recession it is hard for others not to go the same way given its importance as a driver of the world economy. So the double signal is important.

“There is normally a lag of about one year from inversion to recession so the curves are signalling problems for 2020.

“That said the UK has enough troubles in the near term having already experienced one quarter of contraction in the economy in Q2 2019 and facing the prospect of a hard Brexit in Q4 2019.

“The yield curve is saying that any post Brexit bounce in growth is likely to be short lived in the UK – food for thought for the government’s general election strategy and the Bank of England which continues to hint at raising rates.”

The chart below shows the difference between 2 and 10 year government bond yields in the US and UK which creates the yield curve. The figures shown are as at the end of the day. The UK yield curve inverted during the day on 14 August 2019.

By David Brett

Source: City AM