In the long tradition of government policies producing unintended consequences, last week provided a vivid reminder of how fiscal and regulatory tweaks can ripple across the economy in unexpected ways.
From the 18th-century brick tax—originally introduced to fund the American War of Independence, but later blamed for structural issues in British architecture—to today’s challenges, poorly timed or poorly designed policies continue to reshape behaviour and markets.
Among the most visible consequences last week was a sharp fall in payroll employment, the largest monthly drop since the early days of the pandemic. The culprit, at least in part, was the hike in employer national insurance contributions, a tax rise that appears to have prompted employers to cut staff. Meanwhile, the UK’s GDP figures for April disappointed, with some activity pulled forward into March in anticipation of further tax and tariff changes. April was also hit by the so-called stamp duty cliff edge, as buyers rushed to complete transactions before new thresholds took effect.
The result was a string of lacklustre indicators that, while troubling for the economy, have delivered one unexpected silver lining: growing optimism in the mortgage market.
Last week’s economic data has put downward pressure on mortgage rates, as financial markets recalibrate expectations for interest rate cuts. Adding to the case was a cooler-than-expected US inflation print, prompting speculation that central banks on both sides of the Atlantic will ease sooner than previously thought.
Markets now expect the Bank of England’s Monetary Policy Committee (MPC) to cut rates twice in 2024, most likely by 0.25 percentage points each in September and December. Some analysts, however, say even that may prove too slow.
“The MPC’s ongoing guidance of ‘gradual and careful’ rate cuts appears to be on borrowed time,” said Michael Brown, senior research strategist at Pepperstone.
“If the economic landscape remains as dour as it is at present, and inflationary pressures have subsided as expected, the MPC will likely find themselves considerably behind the curve.”
Brown said a rate cut to 4.0% in August, down from the current 4.25%, was increasingly plausible. While geopolitical uncertainty—especially in the Middle East—could put upward pressure on oil prices and inflation, he cautioned against overreacting to global events.
“Financial markets are always incredibly quick to price in geopolitical fear but tend to be equally quick to discount it again,” he noted.
The UK housing market, meanwhile, is showing signs of stabilising after a chaotic spring. The stamp duty threshold was lowered from £250,000 to £125,000 in April, pushing many buyers to complete purchases in March to avoid a tax hit. First-time buyers were also offered incentives worth up to £11,250. The result was a temporary distortion in transaction data, with activity plunging in April.
Now, with that distortion fading, confidence appears to be returning.
The Royal Institution of Chartered Surveyors’ (RICS) latest survey showed that buyer demand and sales were still subdued in May, but the outlook had improved since April. The net balance of respondents expecting sales to rise over the next three months stood at -5%, up from -13% the month before.
Knight Frank data showed that the number of offers made in May was 9% lower than a year ago, an improvement on the 18% year-on-year drop recorded in April. That suggests the worst of the post-stamp duty lull may be over.
“The market took a breather in April, but demand is still there,” said Andrew Groocock, chief operating officer of the estate agency business at Knight Frank.
“The problem is that high levels of stock mean the whole buying process has become elongated, and the recovery process is slower.”
While the housing market may be inching back to life, the outlook remains precarious. The Chancellor’s recent Spending Review offered little clarity on future economic strategy, other than to reinforce expectations of further tax rises in the autumn Budget.
That uncertainty, combined with persistently high stock levels and the cautious tone from the Bank of England, means the recovery in housing could remain uneven and stop-start. Yet, the current slowdown is also creating an environment that makes further mortgage rate reductions not just possible but increasingly necessary.
With inflation retreating and economic momentum weakening, policymakers may soon find that the cost of inaction is greater than the risk of moving too early.
As with Pitt’s brick tax, the lesson may be that when unintended consequences start piling up, delay can be more costly than change. For now, borrowers can take some comfort in the fact that the tide may be turning in their favour—even as the broader economy stumbles.
