Market expectations that the Bank of England would lower interest rates for the first time in 2025 came to fruition this week, as on Thursday, the Monetary Policy Committee voted 7 to 2 to lower rates by a quarter of a percentage point to 4.5%. The other two members preferred to cut rates by the larger amount of 0.5%.
This is the third cut by the BoE in just over six months as data suggests
the UK economy weakened in the final months of 2024. Markets had been pricing
in a total of three rate cuts this year, but after BoE governor, Andrew Bailey,
spoke at a press conference about the slowing economy, swap markets now expect
four cuts this year.
The Monetary Policy Committee voted 7 to 2 to lower rates by a quarter of a percentage point to 4.5%.
Construction industry reaction
Housebuilders and construction companies benefited most from the interest rate news, with the FTSE350 household goods and home construction index up 1.7% after the announcement. Vistry, a construction company, was up 3.2% intraday, and housebuilder Persimmon was up 2%. Construction companies and housebuilders are highly sensitive to interest rates due to the effect rates have on house affordability.
... the FTSE350 household goods and home construction index up 1.7% after the announcement.
UK economy growth
The bleak outlook by the BoE of the UK economy to grow just 0.75% this year, along with higher inflation and rising unemployment, has brought to the forefront the challenge chancellor Rachel Reeves faces to grow the UK economy as she promised in her Autumn Budget. Her plans rely on growth in GDP to lead to higher tax receipts, but the outlook suggests she may have to consider breaking her own self-imposed fiscal rules.
Our specialist's final thought
"Her [Rachel Reeves] plans rely on growth in GDP to lead to higher tax receipts, but the outlook suggests she may have to consider breaking her own self-imposed fiscal rules."
