It was only a few weeks ago that Mark Carney, the governor of the Bank of England, suggested it was only a matter of time before UK base rates moved higher. The way he was talking it was looking highly likely would see a move sooner rather than later with many experts predicting the second quarter of 2016. However, today Mark Carney seems to have performed a massive U-turn suggesting there were issues to consider and base rates were unlikely to change in the short term.
As you might expect, amid expectations of an increase in UK base rates, the pound was sold on the foreign exchanges hitting a low of $1.42 it lowest level since 2009. So, how will this pan out for UK property?
Cheap finance
As UK base rates seem set to remain at their historic lows for some time to come this could add fuel to the fire of the UK property market. There were indications that some investors were looking to lock in low finance rates with UK base rates predicted to rise so no doubt we will see others now follow suit. At this moment in time it is unclear exactly when UK base rates will eventually rise and Mark Carney has flip-flopped so many times it is difficult to know exactly what he is thinking!
When you bear in mind savings rates in the UK and the potential rental yields on selected properties there is a possibility more people will be tempted to use their savings to acquire property as long-term investments.
UK economy
One of the reasons why Mark Carney suggests UK base rates will not rise in the short term is the outlook for UK economic growth. It is true to say UK economic growth has been weakening of late and will likely be impacted by global financial markets which are struggling at the moment. However, are we really in such a different situation than we were just a few weeks ago when the Bank of England was waxing lyrical about the imminent rise in UK base rates – based upon an economic recovery?
It was interesting to see the International Monetary Fund yet again lowering its forecast for worldwide economic growth amid concerns about the Chinese economy and how this may impact the worldwide economy. Indeed the ongoing difficulties felt by the oil market will keep inflation to a minimum which is likely to be at or around 0% for the foreseeable future. Some may be surprised to learn that positive inflation is better for the economy than zero inflation although this has to be in a controlled manner. Interestingly, UK inflation averaged just 0.2% during 2015 which is the smallest annual inflation rate since the 1960s.
Conclusion
It was intriguing to see Mark Carney yet again change his mind regarding UK base rates amid suggestions there will be no movement for the foreseeable future. We all know about the ongoing issues in China, the falling oil price but have things really changed so dramatically for the Bank of England to justify a policy U-turn over such a short space of time?