The Bank of England or the government – who holds the key to boosting construction?

The new government has pledged to ‘get Britain building again’ and, despite the hiccup of discovering £22 billion in unfunded pledges in its first few weeks at work, is busy rolling out its programme of new legislation and policies.

Meanwhile, the Bank of England, which was granted independence to set interest rates the last time Labour swept to victory, has lowered the base rate for the first time since March 2020 after holding it at 5.25% for a year.

Both institutions can influence construction activity, but which will hold more sway over the industry in the near future?

We polled 300 construction professionals, asking them which they thought will have the greater impact over the next 12 months, and opinion was divided.

37% said the government would, 24% said the Bank of England, and 34% said they would have an equal impact in the next year. 6% said they didn’t know.

For BCIS Chief Economist, Dr David Crosthwaite, the Bank of England has the potential to impact construction output the most, at least in the short-term.

He said: ‘New construction work is essentially driven by investment and so takes a hit when borrowing costs are high. Investors will only get involved in a scheme if they can see a satisfactory return on their investment.

‘The Labour party’s desire to attract private investment to support construction is crucial, especially as it’s been so lacking over the last few years because of challenging conditions and instability. I think the government has already taken steps to address the stability issue, though economic conditions will remain much more of a challenge. We know public funds are likely to remain tight through the course of this parliament.

‘The new government says it can give investors the certainty they need to fuel growth and has pledged to strategically use public investment, where it can, to unlock additional private sector investment. In that vein, they’ve set up the National Wealth Fund with a target of attracting £3 of private investment for every £1 of public investment.

‘The problem is, private investment relies on a thriving wider economy, a favourable corporate tax regime and borrowing costs that are not prohibitive. Looking at our current state, none of these conditions exist in the UK at the moment so, while Labour may want to attract private investors, it seems unlikely that they would be able to realise the return on investment needed.

‘I believe what happens with borrowing costs over the coming months will have more of an impact on project decisions and investor confidence than any particular government schemes. We also have to wait and see exactly what makes it into the Chancellor’s first budget at the end of October.’

Dr Crosthwaite also pointed to other benefits of reduced borrowing costs for the industry.

He said: ‘Affordability has affected demand in the housing market significantly as people’s mortgage rates have risen and budgets for repair and maintenance, particularly in home improvements, have been constrained. Reductions in the base rate will increase activity in these areas too.’

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