An economic recovery, but is it enough for a base rate?drop..?

Hello Readers,

If you’re following the Bank of England’s interest rate announcements, you will undoubtedly be aware that the latest decision was to hold the base rate at 5.25%, however it’s possible there may be a rate cut later in the year.

Interestingly, the BoE Chief Economist Huw Pill commented how:

?“We still have a reasonable way to go before I am convinced that the persistent momentum in underlying inflation has stabilised at rates consistent with achievement of the 2% inflation target on a sustainable basis.” ?

Perhaps we will see a rate cut in September; a few months later than the delayed cut I predicted earlier in the year. There may, however, be a shaft of light as first quarter GDP showed an increase of 0.6%, lifting the country out of recession and being the fastest growth in two years.

Not only this, but the 0.6% growth beat the 0.4% forecast set by the Bank of England and economists as polled by Reuters.

There are always two sides to an outlook and here’s what the main sides of the political table comment:

Jeremy Hunt, chancellor, welcomed the data saying it was?“proof that the economy is returning to full health for the first time since the pandemic”.

However, Rachel Reeves, Labour’s shadow chancellor, explained how it was?“no time for Conservative ministers to be doing a victory lap”, saying that the economy is?“still ￡300 smaller per head”?than when Rishi Sunak took over from Liz Truss.

The graph below from the?Financial Times?illustrates this growth and whatever side of the political debate you sit, growth is certainly welcome news!

But with GDP up, what of inflation as that’s the key driver to a base rate drop according to my understanding. I have found this helpful OBR graph which outlines how the projected rate of inflation could hit 2% by the end of Q2 this year and below 2% until it increases slightly to 2% in 2027.

This drop to inflation should mean better mortgage and bridging rates (and hopefully lower lender fees). You’ll see how the past two years have stood out as a huge leap, double what we saw even in 2007!

As investors, being aware of the economic climate is crucial not only because it has a direct impact on the cost of borrowing but also because it is connected strongly to house prices and, during a key political year such as this one, a possible change in government.

Ok, so with a YouGov poll for the Times putting Labour 30 points ahead in the polls since the mayoral elections with Labour on 48% and the Conservatives on 18% a change in Government looks highly likely as we stand but as we know, anything can happen.

Could Rishi call a last-minute election if inflation continues to fall and with it the base rate eventually drops and if he did, would the Conservatives win? There’s a lot to mull over!

I was watching Sunday Morning With Laura Kuenssberg and Lord Cameron commented on how it’s looking like?“Rishi’s recovery”?as opposed to?“Rishi’s recession”,?but whilst this may be the case will it be enough to win? I certainly know that opposing parties could rephrase this in a best case perhaps to?“Rishi’s recovery to the Conservative’s recession”.

If a Labour Government do get elected, what would this mean for landlords and how does the property market now look with this revised economic confidence? I will be looking into these points over the next few articles so be sure to keep an eye out.

Hasan