House prices are forecast to rise by 2.5% this year on the back of this month’s base rate cut if further reductions follow, according to Savills.

The Bank of England’s “finely balanced decision” to cut interest rates to 5%, the first reduction in four and a half years provides “a signal to the market that the Bank feels it has turned a corner in the battle against inflation,” says the property agent’s head of residential research Lucian Cook.

Cook adds: “As a result of the cut, mortgage rates will be on course to return to more affordable levels, gradually improving the range of buyers in the market and their buying power.

“We expect this to feed through into more market activity in the autumn, particularly if there are further cuts to the base rate in the coming months.”

Savills comments come as the UK economy grew by 0.6% between April and June as it continued its recovery from the recession at the end of last year, official data shows.

This growth data left traders betting on a 39% chance of a back-to-back base rate cut in September.

However, money markets believe there is an 82% chance of two Bank reductions before the end of the year.

Resolution Foundation senior economist Simon Pittaway says: “The UK economy has continued to bounce back from its recession last year, and has recorded the strongest growth of any G7 economy over the past six months.

“But that’s where the good news ends. Britain’s medium-term record is far less impressive, and has been driven by a growing population rather than rising productivity.

“Without a return to productivity growth, living standards will continue to stagnate and Britain will continue to fall behind its peers.”

But Deutsche Bank UK chief economist Sanjay Raja adds: “For the Bank of England, the slightly lower growth rate (including its composition) should leave the door open to further rate cuts – particularly given yesterday’s weaker inflation data.”

UK house prices rose 0.3% month on month to £266,334 in July, but the annual growth rate picked up to 2.1%, according to the latest Nationwide data.

Savills’ Cook says: “Though modest, it’s still likely to be the first time house price growth has outpaced the underlying rate of inflation since September 2022.”

“Steady cuts to the base rate should open greater capacity from 2025 onwards underpinning our forecast for total house price growth of 21.6% over the five years to the end of 2028.”

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