By Michael Duggins, Director – Taygate Capital
The Bank of England’s recent decision to reduce the base interest rate to 4.75% is an indicator of cautious optimism within the UK economy. While lower rates generally stimulate economic activity, property investors should note that inflation is now expected to stabilise at the 2% target by early 2027, a year later than previously forecasted.
Interest Rates, Inflation, and Property Investment
Governor Andrew Bailey’s emphasis on a gradual approach to interest rate cuts reflects the need to balance economic support with inflation control. The Monetary Policy Committee (MPC) voted 8-1 in favour of the quarter-point rate cut, aiming to manage inflation’s gradual decline without risking price volatility.
However, recent budget measures from Chancellor Rachel Reeves—amounting to £70 billion in tax adjustments and borrowing—are expected to add up to 0.5% to inflation over the next two years. This includes new fiscal policies, such as the extension of VAT to private school fees, a national insurance rise, and assumptions around fuel duty increases. Investors should anticipate that these adjustments will create minor upward pressure on prices, peaking around 2026.
Investor Insight: Lower interest rates could create more favourable borrowing conditions, but the projected inflation increase in 2025-2026 may also mean that the Bank takes a slower approach to further rate reductions. Property investors should consider fixed-rate financing options to lock in lower rates now, potentially offsetting future inflationary pressures.
Long-Term Stability and Real Estate Outlook
Despite these short-term inflationary challenges, the Bank expects GDP to grow by 0.75% in 2025, supported by fiscal stimulus. As Michael Duggins, Director of Taygate Capital, explains, “Investors should be optimistic about the UK’s long-term stability. With cautious rate cuts and managed inflation, we’re entering a period where strategic property investments could yield significant rewards.”
The MPC’s incremental approach allows policymakers to monitor economic responses, ensuring a stable environment for both businesses and investors. For property investors, this stability is essential as it impacts rental demand, property values, and investment yields.
Investor Insight: Investors should look towards growth areas likely to benefit from a stronger GDP and stable inflation. Residential properties in high-demand areas, as well as sectors like commercial real estate in economically vibrant cities, could yield attractive returns as the economy stabilises.
Property Investment Opportunities in a Changing Market
Lower interest rates combined with stable inflation projections may present a unique opportunity for property investors. With borrowing costs expected to remain relatively low, there’s potential for enhanced returns on property investments, especially in sectors expected to benefit from economic resilience, such as residential rentals and commercial properties.
Investor Insight: As inflation begins to stabilise, sectors with strong rental demand—like the build-to-rent market—may become increasingly attractive. By positioning strategically within these areas, investors can take advantage of potential capital growth as the economy strengthens.
