Tariffs split the Bank of England
Making sense of the latest trends in property and economics from around the globe
3 minutes to read
It's taken more than five weeks to find out how policymakers think Donald Trump's rupturing of the global trade system will impact the UK economy.
It turns out it's not a big deal. The Bank of England's updated baseline forecast, published alongside its interest rate decision yesterday, suggests tariffs will reduce GDP growth by 0.3% and inflation by 0.2% during the next three years relative to its February forecast.
“This is not doom and gloom at all,” Bank of England governor Andrew Bailey said after the decision.
There's clearly a fair amount of disagreement over the likely impact of tariffs between members of the Monetary Policy Committee (MPC), and that explains the three-way split on the rate decision. Five voted for a 25bps cut to 4.25% and the other four members were split evenly between holding rates steady and executing a 50pbs cut to 4.00%.
Improving affordability
Investors took that split as a hawkish signal. Ahead of the decision, traders were expecting three quarter-point rate cuts through the remainder of 2025 - in addition to Thursday's reduction. In the hours following the vote, investors were pricing in two further cuts, with about a 40% chance of a third.
That puts the prospect of any substantial easing of mortgage rates on ice for the time being. Mortgage lenders have cut fixed rates aggressively in recent weeks, and almost all large institutions now have products available below 4%.
Those reductions, alongside rising wages, have improved affordability and put a floor under house prices. Average values climbed 0.3% in April, Halifax reported yesterday, bringing the annual growth rate to 3.2%.
However, as the Bank of England noted, while quoted mortgage rates have fallen, effective interest rates - what people are actually paying - continues to rise. Borrowers are currently rolling off fixed rates agreed five years ago, when the base rate was just 0.10%. This will tighten household budgets and potentially dampen housing market activity over the coming quarters.
More upbeat
Estate agents agree that prices are broadly flat, despite the fact that activity has cooled following the April changes to Stamp Duty, which reduced the nil-rate threshold from £250,000 back to its pre-pandemic level of £125,000 for most buyers.
The measure of new buyer enquiries in April's RICS Residential Market Survey fell to -33%, deepening declines from previous months. The net balance for agreed sales fell to its weakest reading since August 2023.
Agents are notably more upbeat about the year ahead, with a net balance of +39% expecting house prices to rise over the next twelve months.
Meanwhile, conditions continue to worsen for tenants in the rental market. Measures of demand registered a net balance of +14%, which new landlord instructions fell sharply again. Agents expect further upwards pressure on rents during the months ahead.
Rising pressure
The sharp appreciation of Asian currencies this month has triggered major central bank interventions, particularly in Hong Kong, where authorities have spent close to $17bn to defend the currency peg - a fixed exchange rate system in which the Hong Kong dollar is allowed to trade only within a narrow band against the US dollar.
As Adam Tooze has noted, this pressure forces pegged regimes – like Hong Kong, the UAE, and Saudi Arabia – to print money aggressively to avoid unwanted currency strength. In practice, this liquidity often flows into local equities or real estate.
The implications for global property markets could be significant. With trillions of offshore dollar holdings under pressure and local currencies gaining ground, capital is poised to rotate inward. Real estate is consistently among the top targets for liquidity in search of stability.
In other news...
Switching mortgage lender made easier to boost competition (Times).