It’s been three weeks since the UK voted for Brexit and to leave the European Union.
In that time, we’ve seen the appointment of a new Prime Minister, the creation of an entirely new government, the value of the pound decline and begin to recover, and the FTSE 100 rally to an 11-month high.
Following this challenging period for the United Kingdom, both politically and economically, a sense of normality is beginning to return to the country as the establishment prepares to face a brand new challenge – making a success of Brexit.
Whilst the political parties have been immersed in leadership contests and the markets have attempted to make sense of the impact that the UK’s exit will have economically, one of the biggest questions has been how the Bank of England will react in the aftermath of Brexit.
Maintaining Economic Stability and Awaiting Market Impact
The expectation from many in the run up to yesterday’s announcement was that the Bank of England would work to decrease the cost of borrowing by reducing the base interest rate to 0.25%.
Instead, Mark Carney, governor of the Bank of England, and the 8 other members of the Monetary Policy Committee (MPC) delivered a surprise to the market by electing to keep the base interest rate at 0.5% - marking the 88th consecutive month since the rate was first implemented in March 2009.
Explaining their decision, the Bank of England said:
‘The MPC (Monetary Policy Committee) was committed to taking whatever action was needed to support growth and to return inflation to the target over an appropriate horizon. To that end, most members of the Committee expected monetary policy to be loosened in August.
‘… Against that backdrop, most members judged it appropriate to leave the stance of monetary policy unchanged at this meeting.’
Just as the global financial markets have been attempting to make sense of the impact of Brexit, so has the Bank of England. At this stage, the Bank has indicated that they have no intention of changing the rate until August at the earliest, allowing them to fully assess the implications of the referendum vote.
The decision to delay any cut to the base interest rate at this stage has been widely praised by economists, who have suggested that any reduction in the interest rate could be a reactive decision rather than considered assessment of the economic situation of the UK following Brexit.
Speaking to the Guardian, Andrew Sentence, senior economic advisor at PriceWaterhouseCooper and a former member of the MPC, said:
‘Though political events have been fast-moving, there is a need for a stable economic policy until we are clearer how the economy is performing in the wake of the EU Referendum result. That will not be clear until the autumn, and the MPC should hold fire until then. The MPC still won’t have enough information in August to make a proper assessment of the post-Brexit economic situation.’
Status Quo for Buy to Let Investors
With the Bank of England biding their time to see how the market responds to the increased economic and political stability brought about in the past week, property investors are now in a better to position to consider their investment strategy as the UK navigates its exit from the EU.
Whether you are looking to purchase using leverage, a full cash payment or your transaction is already in process, yesterday’s announcement offers from the Bank of England: in post-Brexit Britain, it’s business as usual.
For those already in process of making a transaction, the impact of Brexit will be minimal. If you are purchasing using leverage, your mortgage rate is established. Whether you are buying with a fixed rate or a tracker rate mortgage, the decision to maintain interest rates also keeps any planned payments at the same steady level that it was prior to the referendum on 23 June.
Whilst yesterday’s announcement brings comfort to those with standing transactions, the Bank of England’s decision to sit back and wait for greater market clarity makes property purchases more of a waiting game.
In their statement, the Bank indicated that the earliest time that they would consider a rate cut is August, with many economists, such as Andrew Sentence. suggesting that the MPC should actually wait until the autumn to make their decision.
The tone of the announcement, and the wider implications of market conditions, suggests that the Bank reducing the base rate to 0.25% is not a question of if, but when.
As a result, those purchasing with a mortgage may be wise to wait and see how the Bank reacts in the coming months before committing to a property purchase.
If the rate is cut, the cost of borrowing drops, providing purchasers with an opportunity to secure a better mortgage of themselves and ultimately maximising their investment. In the weeks ahead, purchasers looking to purchase may be rewarded for their patience should the Bank choose to cut the base rate.
For cash buyers, there is less impetus to wait. With the base interest rate maintaining a 322-year low for yet another month, those looking to invest cash funds would be well served to seek out a yielding property investment asset that will work harder for you than any bank account available on the market.
With rates still anticipated to be cut by the end of the year, now is an excellent time to capitalise – especially for international investors who can capitalise on a weakened pound, which remains 10% lower in value than it was prior to the referendum.
To find out more about Brexit and how it could impact on your property investments, please visit our Brexit news section for all of the latest information and analysis.