Cloud computing is one of the most transformative digital technologies across all industries. Cloud services benefit businesses in so many ways, from the flexibility to scale server environments against demand in real-time, to disaster recovery, automatic updates, reduced cost, increased collaboration, global access, and even improved data security. Numerous financial institutions around the world are already reaping the benefits of cloud infrastructure to fit their technology needs today and help them scale up or down in the future as economies evolve. According to research by the Culture of Innovation Index, 92 per cent of corporate banks are already utilising cloud or planning to make further investments in the technology in the next year.
The Bank of England is the latest financial institution to announce it has opened bidding for a cloud partner to support its migration to the cloud. Craig Tavares, Head of Cloud at Aptum, explains the significance of the Bank's decision to Finance Monthly.
As the UK’s central bank seeks to move to a public cloud platform, IT decision makers are likely to encounter hurdles along the way. Figuring out the right partner will be half the battle for the Bank of England; it can be very difficult to identify and map out the broader migration and ongoing cloud infrastructure strategy.
The central bank’s cloud computing approach reflects an evolution in the way financial organisations are viewing data and the applications creating this data. The industry wide shift to viewing data as an infrastructural asset could have precipitated the Bank of England’s own move to the cloud. As such, the organisation should consider these four areas to determine their cloud strategy and partner -- performance, security, scalability and resiliency.
Figuring out the right partner will be half the battle for the Bank of England.
Performance
Traditionally, financial institutions are known for their risk aversion and have been hesitant to undertake digital transformation due to their reliance on legacy systems. Fraedom recently found that 46 per cent of bankers see this challenge as the biggest barrier to the growth of commercial banks. But due to issues surrounding compliance, moving completely away from legacy systems isn’t always an option. This is no different for the Bank of England which is looking to move to a public cloud platform in order to enhance the overall performance of customer payment systems in the new digital age.
Legacy IT systems can prove to be a challenge for financial organisations looking to move applications to the cloud. Outdated processes often lead to system failures, leaving customers unable to access services, resulting in increased customer loss. However, with public cloud it is crucial to find the right combination of cloud services by defining the proper metrics for application performance and storage of critical data.
Legacy IT systems will need to co-exist with new or refactored cloud-based applications. Because of this, the bank will need to consider different strategies using hybrid cloud and multi-cloud architectures to align performance and cost. And when it comes to time-to-revenue or time-to-value the bank will be looking at traditional IT methodologies while leveraging cloud native approaches. The cloud native approach will lead to adopting DevOps as a new culture and Continuous Integration and Continuous Delivery or Deployment (CI/CD) as a process. These practices automate the processes between software development and operational teams which as a result will allow the bank to deliver new features to customers in a quicker, more efficient manner.
Depending on the hybrid IT architecture being used and whether the approach is traditional IT or cloud native, there will be different ways to ensure the best application and data lake or data warehouse performance. In order to do this, the bank will need to partner with a technology expert who will be able to offer guidance on the different levels of technology stacks required during the cloud migration.
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Security
Central banks have traditionally kept close control of their IT systems and long expressed concern over the security of their customers’ information and financial transactions. As such, migrating to a public cloud platform and handing over to a cloud partner could heighten these worries. Global banks are expected to adhere to strict regulations to reduce the number of security issues within the financial sector and all new technology implementations must be compliant.
As complex regulatory requirements – such as the Markets in Financial Instruments Directive (MiFID) and Anti-Money Laundering rules (AML) - continue to cause a barrier to cloud adoption in the financial sector, the Bank of England should consider a partner that is able to adapt to high regulatory demands. As such, a three-way partnership should form between the Bank of England, cloud consultants and cloud service providers. This particularly applies if the UK central bank were to take on a multi-cloud approach – leveraging Amazon, Azure or both. This way, the three can be aligned and acknowledge the journey the bank has taken so far as well as the future of the financial organisation from a regulatory standpoint.
Adopting a partnership approach decreases the risk of security breaches which often cause client relationships to disintegrate. In the past, security was treated like a vendor-customer relationship rather than an important partnership from day 1. Data is a major focal point in this discussion - how the bank is protecting customer data or how they are managing financial data. Cooperation between partners ensures the configuration of every cloud service being used has the right security measures integrated into it from the start observing compliance requirements like GDRP, data sovereignty and data loss prevention.
Adopting a partnership approach decreases the risk of security breaches which often cause client relationships to disintegrate.
Scalability and Resiliency
With a growing abundance of data, The Bank of England will need a cloud platform that will allow them to scale up or down accordingly. Fuelling the growth of the bank’s data are its applications, which also need special scaling and resiliency considerations just like the data itself.
Keep in mind, cloud is not an all or nothing discussion. Not every application the Bank of England has needs to go to the hyperscale public cloud. For example, it may start with a progression to private cloud and then to a public cloud vendor agnostic framework based on the scaling and resiliency needs. The financial institution should understand which applications are best suited for the cloud at this time and which will be migrated at a future point. They should ensure that cloud is an enabler and not a detractor. It’s important to understand the cloud journey is an ever-changing process of evaluating business goals, operational efficiencies and adopting the right technologies to meet these outcomes at the right point in time based on ROI.
The UK central bank should consider moving to a container-based environment and cloud platform services (but as mentioned, in a hybrid cloud architecture), technologies that will enable an efficient process of building and releasing complex applications with the right scale in/out and uptime capabilities. The bank may incorporate Site Reliability Engineering (SRE). SRE is a discipline that leverages aspects of software engineering and applies them to infrastructure and operations challenges. The key goals of SRE are to create scalable and highly reliable software systems.
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The Bank of England has come to recognise the significant impact cloud can have on the business and the benefits cloud technology will bring to their customers. Banks will become leaders in setting the bar for other organisations and industries when it comes to moving to the cloud. However, when it comes to choosing the right collaborator, The Bank of England should seek a cloud partner who is able to meet their business objectives, understands both traditional IT and cloud native approaches, along with hybrid multi-cloud and the data challenge which includes performance, security, scalability and resiliency. Working with the right Managed Service Provider (MSP) partner can provide them with the necessary expertise and developing solutions that bridge the gap from where they are today, to where they want to go.
The Bank of England has announced a cut to interest rates on Wednesday morning in a bid to safeguard the UK economy amid the coronavirus epidemic.
Rates have been reduced from 0.75% to 0.25%, and the BoE has also reduced a key capital buffer to 0%, which it claims will enable banks to better “supply the credit needed to bridge a potentially challenging period.~
Mark Carney, the Bank of England’s outgoing governor, said that the move was intended to combat a “sharp fall in trading conditions”, including a decrease in spending on non-essential goods. However, he said in the statement that the UK economy is on course to shrink in the coming months.
“I would emphasise the direction is clear, though the orders of magnitude are still to be determined” he said.
European markets have already seen an increase in value following the Bank of England’s measures. The FTSE climbed by roughly 1.1%, while Germany’s DAX and France’s CAC 40 rose by 2% and 2.3% respectively.
This market upturn may reflect optimism in Wednesday’s Budget release, which is expected to contain further measures to support growth in the UK economy.
Mr Carney confirmed that the timing of the rate cuts was by design, stating that the action was taken on Budget day to co-ordinate for “maximum impact”.
That possibility has pushed many government bond yields to new lows in recent weeks, while global equity prices have been volatile. Below Rhys Herbert, Senior Economist, Lloyds Bank Commercial Banking looks at the evidence.
And while some economic data might be confusing, I think there is a clear message.
First, that global economic growth has slowed and may slow further, and second, that there is a pronounced difference between weak or even falling activity in the manufacturing sector and still relatively buoyant service sector.
So, what might be causing this?
Manufacturing v services
It seems probable that the manufacturing sector is being hurt by the ongoing trade dispute between the US and China. Indeed, the US manufacturing sector is now in decline for the first time in a decade.
And the Bank of England (BOE) flagged last week that, because the trade war between the US and China had intensified over the summer, the outlook for global growth has weakened.
The Bank’s Monetary Policy Committee added that the trade war was having a material negative impact on global business investment too.
The main impact is on confidence - or more accurately lack of confidence – which is holding manufacturers back from investing. As a result, we’ve seen a slowdown in world trade and in demand for manufactured goods.
In contrast, demand for services is being supported by relatively buoyant consumer spending. Yes, consumers are probably reluctant to splash out on big ticket items like cars right now, but overall, they are still willing to spend.
Consumers are probably reluctant to splash out on big ticket items like cars right now, but overall, they are still willing to spend.
The central conundrum
The key question going forward is whether it is more likely that manufacturing rebounds or that service weaken from here?
That is the conundrum that central banks need to weigh up in setting policy.
So far, the majority have decided that they are sufficiently concerned about the downside risks to take out some insurance and adopt policies designed to support economic growth.
Back in July, the US Federal Reserve did something it had not done for over a decade. It reduced interest rates – by a quarter point to 2.25% (upper bound).
It was widely seen as an insurance move against increasing global economic headwinds, emanating mainly from the US-China trade dispute.
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It repeated the move last month, lowering the target range for its key interest rate by 25 points to between 1.75% and 2%. The accompanying statement repeated July’s message that, while economic conditions are probably sound, a bit of insurance against downside risk was advisable.
Meanwhile, in his penultimate meeting in September, this month, European Central Bank President Mario Draghi announced a package of stimulus measures including a reduction in its deposit rate to a record low of -0.5% and the introduction of a two-tier system to exempt part of banks’ excess liquidity from negative rates.
He also announced a resumption of the bond-buying programme at €20bn a month from November and, importantly, signalled no end date to purchases.
Draghi can argue that the weak Eurozone PMI suggests the economy is stagnating, supporting this action.
But the UK has not followed this strategy.
On the sidelines
The BOE is still wary enough about potential inflationary pressures from a tight labour market and rising wage growth to talk about the possibility of interest rates needing to go up.
But last month, the BOE concluded that the longer that uncertainty goes on, the more likely it is that growth will slow, especially given the weak global economy.
We will see if the message changes, but the likelihood is that BOE rate setters will want to continue to remain on the sidelines and keep rates unchanged at 0.75%, not least because the Brexit outcome remains unsettled.
The government’s official preferred Brexit position is for a deal and that assumption in the Bank’s forecast points to interest rates rising “at a gradual pace and to a limited extent”.
But the BOE also noted growing concerns about risks to growth, joining the US Federal Reserve and the European Central Bank, which both seem to have decided that risks are skewed to the downside.
But, while escalating tariff wars, slowing growth in the US and China and Brexit uncertainty mean there are credible reasons to worry that 10 years of steady expansion could be coming to an end, it is still far from certain that the current slowdown means a recession is looming.
There are growing calls for a national digital ID scheme. The Bank of England’s Mark Carney is one of the latest to back such a move, reasoning it will better protect people’s finances. A new techUK white paper makes the case that digital identities are essential to unlocking the value of the digital economy. With many advantages being championed, Chris Lewis from financial security software developers, Synectics Solutions, looks at how a scheme could work to benefit financial organisations and consumers.
A national digital identity scheme has significant potential to deliver in two key areas; security and simplicity. Both of these factors are of increasing importance to consumers and businesses.
Data released last year by fraud prevention service, Cifas, showed identity fraud hit an all-time high in 2017. Levels of this type of crime have increased 125% in a decade and it’s a problem affecting consumers of all ages. It costs financial organisations billions of pounds, while proving stressful and time-consuming for consumers.
Increasing regulation to better identify and verify customers has been designed partly to tackle the growing threat of ID fraud. This has been met by a willingness among financial organisations, and an understanding by consumers, but is far from the perfect solution. Both parties appreciate the fundamental sentiment of Know Your Customer and Anti-Money Laundering regulations and checks, and likewise, both share the frustrations of how these, inadvertently, compromise customer experiences.
It is cumbersome and tiresome for consumers to have to produce various forms of identification and verification, remember several passwords and go through multiple authentication checks – which will only increase following PSD2. People want their money to be safe and to complete secure transactions, but also want applications and interactions with service providers to be simple and straightforward. A national digital ID scheme could realise this.
Potentially, such a scheme would involve two levels of ID profile for each individual. These would include a private profile that consumers manage using a combination of soft and hard verification. This profile is then cross-checked against an individual’s public profile, which is verified according to a wide-variety of data sources. For example, this may include information from credit reference agencies, banks, insurers, employers and public sector unique identifiers such as National Insurance numbers. The two levels are validated to create one unique digital ID for each person.
The digital ID would then be stored in a secure ‘wallet’ type application on a smart phone. Consumers would be able to access this via a passcode or potentially through facial recognition or fingerprint scan, depending on the type of phone. The ID could be instantly presented to a financial organisation, either in person by showing the mobile device or electronically by sharing the profile through a secure transfer mechanism. Both means of presentation would also be backed-up with other levels of customer authentication but would be less time-consuming and significantly more secure.
A self-served, singular ID of this type would mean each customer verification is based on reams and reams of data and extensive validation, which is constantly updated and accurate. This will make it increasingly difficult for fraudsters to impersonate other people and create synthetic identities. It would also make it harder for criminals to set-up mule accounts for laundering money.
Needless to say, technology will be crucial to the infrastructure and practicalities of realising these benefits. The digital IDs need to be securely stored, accessed, shared and recovered. However, equally as important as technology, is the need for collaboration.
Public and private sector organisations need to come together to share data. This will ensure IDs are kept ‘real-time’ and accurate. It means any fraudulent attempts to impersonate and manipulate IDs are quickly determined and analysed, reducing the ability for criminals to try and use an identity across different sectors and for different reasons. It will also help ‘thin-file’ individuals without a substantial credit footprint through utilising alternative data sources.
Collaboration will also ensure there’s national agreement on one type of digital ID scheme, avoiding the potential for multiple different options. This will fulfil the time-saving and simplicity benefits consumers crave, and which businesses know are important to customer satisfaction. A singular scheme will free-up the capital and resource currently invested in multiple levels of customer verification. This could be invested in other areas to tackle financial crime.
Finally, collaboration could overcome any ‘big brother’ concerns consumers have about sharing their data and it being captured in one place. Big businesses already have lots of data about customers and consumers know this. Feeding this into a central scheme managed by the data subject gives power back to consumers and promotes transparency and trust. Similarly, organisations working together to share customer data presents the opportunity to better reward and incentivise people. The “carrot on stick” approach would help drive public acceptance and adoption of the ID and has already been demonstrated recently across Scandinavia.
Society is not that far away from a national ID scheme. People are already using application processes like ‘sign-in with Facebook or Google’ and using technology to remember log-in details. To take the next step to making a national ID scheme a reality, consumers and suppliers need to be engaged early and be part of the development process.
Following recent incidents such as TSB's systems failure and Visa's service outage, operational resilience is increasingly vital. Bank of England and FCA recently published a report stressing the importance of business continuity during a disaster. Below Finance Monthly hears from Peter Groucutt, Managing Director at Databarracks, who discusses what businesses need/can to do to strengthen their operational resilience during a disaster to absorb any shock a business may experience.
In July 2018, the Bank of England, Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) published a joint discussion paper aimed at engaging with the financial services industry to improve the operational resilience of firms and financial market infrastructures (FMIs).
At the time it was issued, banks and FMI’s were capturing media attention, following several high-profile incidents.
TSB’s failed IT migration has been well publicised, costing the firm £176.4m in various fees and leading to the departure of its chief executive, Paul Pester. In June 2018, shortly before the release of this paper, millions of people and businesses were unable to pay for shopping due to a sudden failure of Visa’s card payment system.
Financial services lead in business continuity
The financial services industry is a leader in business continuity and operational resilience. It has a requirement of a high level of systems-uptime and is well-regulated. The best practices it introduces are often taken and more widely adopted by other industries. Our own research supports this. Our annual Data Health Check survey provides a snapshot of the IT industry from the perspective of over 400 IT decision-makers. The findings from this year’s survey provided some revealing insights.
64% of financial institutions had a business continuity plan in place, compared to an industry average of 53%. Of the financial sector firms with a specific IT disaster recovery process within their business continuity plan, 64% had tested this in the past 12 months – compared to 47% across other industries. Finally, 81% of financial firms had tested their IT disaster recovery plans against cyber threats, versus 68% of firms in other sectors.
While these findings reinforce the strength of the industry’s operational resilience, incidents like TSB and Visa prove it is not immune to failures.
The regulators want to “commence a dialogue that achieves a step-change in the operational resilience of firms and FMIs”. The report takes a mature view to the kind of incidents firms may face and accepts that some disruptions are inevitable. It provides useful advice that can be taken and applied not only to the financial services community, but other industries too.
Leveraging advice to improve operational resilience
So, what can be learned from this report? Firstly, setting board-approved impact tolerances is an excellent suggestion. This describes the amount of disruption a firm can tolerate and helps senior management prioritise their investment decisions in preparation for incidents. This is fundamental to all good continuity planning; particularly as new technologies emerge, and customer demand for instant access to information intensifies. These tolerances are essential for defining how a business builds its operational practices.
Additionally, focusing on business services rather than systems is another important recommendation. Designing your systems and processes on the assumption there will be disruptions – but ensuring you can continue to deliver business services is key.
It’s also pleasing to see the report highlight the increased concentration of risk due to a limited number of technology providers. This is particularly prevalent in the financial sector for payment systems, but again there are parallels with other industries and technologies. Cloud computing, for example, it’s reaching a state of oligopoly, with the market dominated by a small number of key players. For customers of those cloud services, it can lead to a heavy reliance on a single company. This poses a significant supplier risk.
Next steps
Looking ahead, the BoE, PRA and FCA have set a deadline of Friday 5th October for interested parties and stakeholders to share their observations. The supervisory authorities will use these responses to inform current supervisory activity, helping to dictate future policy-making. The supervisory authorities will then share relevant information with the Financial Policy Committee (FPC), supporting its efforts to build resilience in the financial system.
Firms looking to improve their operational resilience should take advantage of this excellent resource – whether in financial services or not.
One of the hottest and most contentious issues facing banks today is how and when to utilise Artificial Intelligence (AI) within a business. AI has transformed many industries and consumers everywhere are becoming increasingly used to the idea of driverless cars, conversational chatbots and suggestive recommendation services.
While AI is relatively new in the financial industry, there are significant concerns and limitations that banks must get their heads around. For example, there is much fear surrounding the integration of AI in workplaces as people believe it will result in job losses and ‘robots’ ruling the world. Even the Bank of England has expressed concern, with their Chief Economist predicting a disruptive fallout from the rise of AI that could make many jobs obsolete.
But when applied in the right way, AI can bring endless opportunities, taking away tedious tasks and amplifying what we do as humans. Tanmaya Varma tells us more.
Where does AI fit?
Discerning how best to use AI, without alienating customers or employees, is a complex issue. Within the finance sector, AI is already being implemented to support with tasks such as fraud detection and management, and credit card and loan risk assessments. JPMorgan Chase, for example, uses image recognition software to analyse legal banking documents. It is efficient and accurate, extracting information and clauses in seconds compared to the 360,000 hours it takes to manually review 12,000 annual commercial credit agreements. This sort of capability could transform the lives of many banking employees as they will no longer be consumed by administrative tasks but can focus on value-added roles instead.
AI is perfectly suited to many straight-forward roles within customer experience. As much as 98% of all customer interactions are simple queries and bots can be used to monitor and streamline these engagements. For example, RBS’s chatbot ‘Luvo’ has the ability to respond to basic customer queries; and can therefore reduce the need for as many customer service employees.
Over the last couple of years, Goldman Sachs, JP Morgan Chase and Charles Schwab have introduced robo-advisers that are able to manage investments, collect financial data and use predictive analytics to anticipate changes in the stock market. While some employees are concerned about competing with this technology, we’re already seeing the use of bionic advisers in the finance sector. These combine machine calculations and human insight to provide a more efficient and comprehensive analysis, whilst also still maintaining the superior customer service clients have come to expect from their financial adviser.
The robots’ limitations
AI has such great potential but there is still one key thing missing – emotional intelligence (or EI) and when customers are involved, this really matters. Where a bank might pay less for a fully automated interaction, the justification for paying more for the human touchpoint is the real value of emotional intelligence, something that computers can’t really provide… yet.
Responding to the emotional cues that your customer displays is an extremely important part of a business relationship, and the ability to read and comprehend these signals plays a huge part in tailoring the customer experience. The big challenge for banks now that chatbots are so readily available is to consider when and where this key human trait is required.
Chatbots can’t easily detect a shift in tone or tension in a conversation and aren’t able to quickly appease a customer. For example, while a robo-adviser is great for an inexpensive and basic service, the issue comes when you have a more unique or sensitive financial situation such as debt or divorce. In this sort of more complex circumstance, a human adviser is perfectly positioned to respond to the nuances of the conversation.
Collaboration is key
There is a great opportunity for AI to go hand-in-hand with human employees - chatbots can be used to streamline the experience, deal with straightforward customers and put more complex enquiries through to the most suitable team member. In this way, banks can bring humans and technology together to provide a superior customer service.
Another example of AI working in tandem with human employees is Relationship Intelligence technology. With thousands of contacts on a database, no adviser can possibly be expected to remember what stage each customer interaction is at and build strong relationships with all of them. Instead, AI can provide insights into who your prospects are, which ones are most beneficial to pursue and when the right time to get in touch is. It can instantly make available information and data from all over the internet about any potential prospect from just a name and email address.
As technology advances, banks are having to walk a fine line between looking for cost-saving efficiencies and smarter ways of working, while ensuring their customers continue to receive excellent and personal service. They also do not want to alienate their workforce and create panic that long-standing staff are slowly being replaced by robots. AI can offer a lot but it doesn’t have the human’s ability to build and maintain vital relationships and collaboration between technology and humans is key here. The successful adoption of AI in the workplace is the issue and opportunity of the moment and one that banks will be contemplating for years to come.
After some time of speculation, the Bank of England confirmed interest rate hike last week, by 0.25%. Already we have seen some banks act fast in passing this hike onto the customer, in particular mortgage buyers, as opposed to savings rates.
In this week’s Your Thoughts, Finance Monthly has collated several expert comments from UK based professionals with expert knowledge on this topic.
Richard Haymes, Head of Financial Difficulties, TDX Group:
While an interest rate rise is positive news for people living on their savings income, or holding pensions and investments, it may prove to be the tipping point for those in financial difficulty or struggling with debt.
Individual Voluntary Arrangements (IVAs) have reached record levels and we expect the rate of monthly IVAs and Trust Deeds to grow by around 17% this year. A rise in interest rates will make it much harder for people in these arrangements, and there’s a risk they’ll default on their strict requirements.
A large portion of people who are in personal insolvency hold a mortgage (over a fifth according to personal insolvency practice Creditfix), and a rate rise will obviously increase their mortgage repayments. Due to these people’s unfavourable credit circumstances, it’s likely that majority of mortgage holders in insolvency are tied to variable mortgage products, leaving them particularly vulnerable to a higher interest environment.
Holders of a £250,000 mortgage will have to absorb a monthly repayment increase of £31* as a result of this 0.25% hike. Modest as it may appear to many, for people in structured debt management plans or IVAs this could have a very significant impact, even resulting in their debt solution becoming defunct or in need of renegotiation.
Jon Ostler, UK CEO, finder.com:
This rate rise decision comes as no surprise. Our panel of nine leading economists unanimously predicted that the interest rate would rise by 25 base points, and this is a positive sign that the economy is growing stronger.
It’s particularly good news for savers, who have suffered ultra-low interest rates for the past decade. They can expect a rise to their savings, albeit a small one. Now is a good time to consider switching your banking products, as banks will be reviewing their rates. Make sure you keep an eye on which banks are offering the best interest rates as not all of their products will increase by the BoE’s 25 basis points.
On the other hand, borrowers and homeowners with a mortgage are likely to face extra costs. For example, those paying off the UK’s average mortgage debt with a variable rate mortgage face paying an extra £17-£18 per month, which adds up to an extra £200 per year or more than £6,000 over the life of a 30-year loan term.
Angus Dent, CEO, ArchOver:
While banks are likely to pass the rate rise straight onto borrowers, they will be less keen to pass it on immediately to savers. Aspirational borrowing such as mortgages and bank loans will get more expensive – so the man in the street needs to counter that with strong returns on savings. Only 50% of savings account rates changed after last year’s rise, so there’s good reason to be underwhelmed.
But this is certainly a step in the right direction for the cautious Bank of England. While such an incremental rise won’t shake the earth, and probably means business as usual, it nevertheless spells good news for the UK.
The country is still hungry for a stronger economy, ten years after the financial crash. Both savers and investors are now aware that to chase higher returns, they need to open the door to alternative opportunities. Alternative finance options that offer higher yields – without sacrificing security – offer savers a path to higher returns in a still-struggling economy.
Savings accounts still aren’t the safety net they once were. Despite this rate rise, savers still need to cast the net wide in the hunt for higher returns.
Markus Kuger, Senior Economist, Dun & Bradstreet:
This rate hike had been anticipated by the markets, despite inflation having fallen in recent months, as UK growth seems to have recovered from the poor performance in Q1. The effects of the rate rise will be minimal, given the Bank’s forward guidance over the past months. The progress in Brexit talks will remain the most important factor for companies and households in the near to medium term. Dun & Bradstreet maintains its current real GDP and inflation forecasts for 2018-19 and we continue to forecast a modest recovery in 2019, assuming the successful completion of the talks with the EU.
Max Lehrain, Chief Operating Officer, Relendex:
The increase in interest rates is a significant moment as it is the first time the Bank of England has raised interest rates above 0.5 in nearly a decade. However, for savers, this change should act as a wakeup call as it is not likely to have a material impact on their investment meaning that those stuck in standard savings accounts are still missing out.
This is in large part down to the rate of inflation far outstripping interest rates, even with today's increase. In simple terms this means that if your savings earn 0.75% interest they are being eaten into by the effects of inflation.
With traditional lenders offering low returns on their savings accounts and cash ISA products, savers who are looking to achieve higher rates of returns should still consider alternative options. Peer-to-Peer (P2P) lending for example, can offer substantially higher returns, giving a good income boost when interest rates are still relatively low.
Innovative savers will identity these options to take this interest rate rise out of the equation. In real terms, over a three year period investing £5,000 in a cash ISA is likely to render a return ranging from £15 to £113, whereas P2P providers offer prospective returns far exceeding that. For example, investing £5,000 in a provider that offers 8%, would see returns of approximately £1,300 over a three year period.
Nigel Green, CEO, deVere Group:
Hiking interest rates now – for only the second time since the financial crash – is, to my mind, premature.
At just above the Bank’s target of 2%, inflation is not currently a key issue. In addition, major uncertainty surrounding Brexit, the looming threat of international trade wars, and absolutely average economic growth, business and consumer confidence are on the slide.
As such, there seems little real justification to increase interest rates now.
Against this back drop, why is the Bank of England raising rates today?
Has the decision been motivated in order to protect reputations and credibility after the Bank’s Governor and some of the committee had effectively already said the rise would happen?
Whilst today’s decision to hike rates is unnecessary, I think that the Bank is likely to refrain from any more increases until after Brexit.
Paul Mumford, Cavendish Asset Management:
The decision on balance might be the wrong one. While all agree that rates need to return to normality eventually, panicking and doing it for the sake of it - or just because other countries are doing it - will only make things worse.
The idea, as in these other regions, is to start incrementally escalating rates in a managed way as growth and inflation tick up. But the UK is in quite a distinct situation. To borrow some terminology from the Tories, the economy is stable, but far from strong - and certainly not booming. Higher interest rates could have very disruptive effects on sectors such as housing, where it could trigger a rush to buy at fixed rates, and motors and retail, which are performing OK but contain a lot of highly geared companies. This does not look like the sort of economy you want - or can afford - to remove demand from. Meanwhile the pound is holding firm at its lower base, so there is no immediate impetus to shore up the currency.
And of course looming behind all this is Brexit. Interest rates may be needed as a weapon to combat sudden inflation from tariffs should the worst happen and we crash out of Europe without a deal. It would make more sense to save the powder until there is more clarity on this front, and we now what sort of economic environment we're all heading into. The last thing we want is to be in a situation where we are stuck with higher and higher rates to combat inflation, while growth remains anaemic or stagnant.
These things are all swings and roundabouts, of course - one big plus from rate rises is that they will ease our mounting problem with big pension fund deficits. Whether this will make it worth the risk remains to be seen.
Stuart Law, CEO, Assetz Capital:
It looks like savers will be disappointed once again. Although the rate has risen slightly, this is unlikely to be passed on to savers, with many banks having form for just applying increases to borrowers.
What’s more, the Bank of England's statement that future increases will be at a 'gradual pace' implies that savers won't see returns that outstrip inflation for months - and potentially even years.
Rob Douglas, VP of UKI and Nordics, Adaptive Insights:
Ultimately, it is the companies that do not currently have sound financial planning processes in place that are likely to be impacted when changes like this occur, as it can upend budgeting and forecasting, making it difficult for finance and management teams to develop accurate financial plans and make business-critical decisions.
The 0.25% extra interest rate is being announced at an already uncertain time, when many fear the long-term effects of a possible no-deal Brexit or a potential trade war with the US on their business, organisations across the country will need to once again adjust their financial plans accordingly. To do this, companies must plan in real-time, with current data from across the organisation, so that they can mitigate potentially damaging consequences, such as a negative impact on profit margins.
The interest rate hike, while expected, is a reminder why businesses need to be able to continuously update their financial forecasts in real-time. Manual spreadsheets and processes simply don’t cut it anymore and finance teams need to be able to respond to economic changes such as this efficiently and effectively. With a modern, active approach to planning and forecasting, businesses will have the foresight and visibility to make better decisions faster, minimising the impact of unexpected government, regulatory or economic changes.
Paddy Osborn, Academic Dean, London Academy of Trading (LAT):
As widely expected, the Bank of England’s Monetary Policy Committee (MPC) raised the UK base rate by 0.25% today, stating that the low GDP data in Q1 2018 was just a blip, the UK labour market has tightened further and wage growth is increasing. This is the highest level of interest rates in the UK in more than nine years, and the MPC’s vote to raise rates was actually 9-0, against expectations of 8-1 or even 7-2.
There was also an unanimous vote to keep the level of government bond purchases at £435 billion, although the MPC remains cautious about the potential reactions of households, businesses and financial markets to future Brexit developments.
Assuming the economy develops in line with current projections, they stated that any future increases in the Bank rate (to return inflation to the 2% target) are likely to be “at a gradual pace and to a limited extent”.
In currency markets, GBP/USD spiked 50 pips higher from 1.3070 within 10 minutes of the announcement, but has since collapsed back below 1.3100. The longer term view for GBP/USD remains bearish, although there are a number of political and fundamental factors which may affect Cable in the coming weeks, namely Brexit developments, the developing trade war, and US interest rates.
The stock market, having fallen over 200 points since yesterday morning, failed to find any solace in the MPC comments and is currently trading at its 1-month lows around 7550. Higher interest rates mean higher cost of debt for companies, and this will often encourage investors to take some money out of their (more risky) stock market investments.
Feel free to offer Your Thoughts in the comment box below and tell us what you think.
Last November, the Bank of England raised interest rates by 0.25% - the first increase for ten years. The Governor of the Bank of England, Mark Carney, warned that we could see two more increases over the next three years – but then in February of this year, the Bank’s policy committee warned that rates may actually need to rise “earlier” and by a “somewhat greater extent” than previously envisaged. Below Steve Noble, COO at Ultimate Finance, provides excellent insight into protecting against rate changes from hereon.
This will concern many SME owners. Research has shown that a quarter of SME entrepreneurs have funded the growth of their business through their own personal finances. The higher payments required when rates rise across mortgages, credit cards and other loans could put a squeeze on them at a time when conditions are already challenging. This is particularly true if high street banks tighten their lending to specific sectors, as happened during the last recession.
If this happens, good businesses could find themselves pressurised on both sides – putting jobs and entire organisations at risk.
My advice to small business owners and entrepreneurs worried about the prospect of almost certain rate rises is to assess the situation in a series of steps:
Work out what impact a rise of 0.25% or 0.5% would have on your repayment costs
Get your calculator out! Pool together all the finance products you have on variable rates and see how much a rate rise could add to your repayments. Many finance websites have handy calculators that will do this for you. The impact of a 0.25% increase may be small on one individual product, but if you have several it could add up.
Is this something that you can absorb, or will it put a strain on already stretched cash flow?
Think about what the likely increases mean for your business. If you are funding the company through your own finances, will rate rises create difficulties? If finances will be too tight following rate rises and banks reign in on lending, there’s no option but to look at the alternatives and rather than expecting the high street to come up with the answers.
Review your business costs and income
Are there are any unnecessary expenses you can cut out? Little business ‘luxuries’ you’ve been allowing that might need to go? On the income side, have you been undercharging for certain services or are you running ‘special offers’ that might need to end?
Fight back against late payments
Research by the FSB shows that late payment costs the UK economy £2.5bn every year and results in more than 50,000 business deaths. If rates rise as expected, black holes in your cash flow caused by late payments will have increasingly dire consequences. Have serious conversations with your partners and suppliers to lessen the problem, rather than accepting it as a usual part of running a business.
Explore the finance options
There are many forms of finance outside of traditional bank loans. For example, invoice finance that enables you to borrow funds against the value of invoices you have issued but not yet been paid for. Purchase finance that pays your suppliers for goods you buy from them. Asset finance for the purchase of business equipment. Or simply short-term loans to help you meet your needs.
Although banks will offer services of this type, the customer experience will be vastly different. Where high street banks will reject a business that doesn’t meet its pre-set criteria, other providers will offer a more flexible, tailored approach. A solution can be produced with payments terms that suit the business in question, rather than a set agreement which simply won’t work for many in need of financial support. As rate rises seem to be looming, now is the time to begin doing your homework.
SMEs are the growth engine of the UK economy and now more than ever its vital they are supported at every turn. Although rising interest rates will prove difficult for many, for those who plan for the future now, the road will become much less rocky.
Following the Bank of England’s (BoE) decision not to raise interest rates last week, Finance Monthly has heard from a few sources who have provided expert commentary.
Richard Haymes, Head of Financial Difficulties at TDX Group:
The decision is good news for those living in debt or teetering on the edge of financial difficulty. We expect the level of monthly Individual Voluntary Arrangements (IVAs) and Trust Deeds to grow by around 17% this year; a rise in interest rates would have a significant impact on the ability of these individuals to meet repayments and ultimately stay within the strict requirements of these debt solutions.
Figures from Creditfix, the largest provider of personal insolvencies in the UK show that 20.2% of its customer base holds a mortgage. It’s likely, due to their credit position, that most of these customers will have a variable mortgage that would have left them particularly vulnerable to an interest rate rise. A 0.25% hike would have left holders of £250,000 mortgages with a monthly repayment increase of £31*. This may appear a modest rise but for people trying to manage debts through IVAs or Debt Management Plans it could have a detrimental impact, rendering debt solutions unviable or in need of renegotiation.
While a continuation of the low interest environment is bad news for people holding pensions, investments and living on savings – reducing their earning potential compared to periods of ‘normal’ monetary policy, a static interest rate provides relief and stability for those in financial difficulty or on the brink of difficulties.
Stuart Law, CEO, Assetz Capital:
This change in thinking for the Bank of England following an expected rate rise is hardly surprising given the economic uncertainty and poor GDP growth figures. We expect that any increases that do happen over the next year would simply be a short-term measure ahead of Brexit, in case there is a need to drop rates again next year.
Even if interest rates do rise slightly later this year, it’s likely to only be by a small amount. Despite the predicted drop in inflation, this announcement is likely to receive a less than warm reception from high-street savers, who are seeing the value of their hard-earned money decreasing each day through inflation – and of course, many banks will not pass all or any of this rise on to savers.
Angus Dent, CEO, ArchOver:
With Britain’s GDP growth at just 0.1%, it’s no surprise that the Bank of England has kept interest rates stagnating at 0.5%.
Just last month a rate rise seemed a foregone conclusion. Today’s decision is yet another result of the uncertainty surrounding the UK’s financial health. And keeping rates so low means savers lose out once again.
Savers leaving their cash languishing in savings accounts in the vain hope of a rate rise will be sorely disappointed. With the economy in the doldrums, it’s time for a serious rethink – crossing your fingers and hoping for the best does not equal a productive savings strategy.
The news that the majority of banks didn’t pass November’s rate rise on to their customers adds more fuel to the fire, showing that even an historic rise didn’t have the desired effect on savers’ pockets.
Savings accounts are no longer a safe bet for decent ROI. Consider alternative financing options that can offer higher yield without compromising on security. Optimism is all well and good – but we all need a healthy dose of realism if we’re going to make our money work harder.
Analysts currently expect the Bank of England to hike interest rates in May, but some are opposed, claiming the market is misjudging the BoE’s plans. Bond market guru Mohamed El-Erian says the potential rate hike is "far from a done deal."
Last week the BoE left interest rates on hold, adding to suspicious they may raise them in May. After all, the BoE has been hinting at increased rates since last November’s hike.
This week Finance Monthly asked experts: What are the indications? What's the BoE's plan? What are your thoughts on future implications?
John Goldie, FX Dealer & Analyst, Argentex:
Carney and Co. were not expected to spring any surprises last week, opting to keep interest rates on hold again, much as the consensus had suggested. While the vote to retain the current status of the asset purchase facility was unanimous, there were dissenting votes from serial hawks, McCafferty and Saunders, who saw that the time was right for the Bank to raise interest rates to 0.75%. Many of the major banks have brought forward their forecast for a hike to May, though Bloomberg's interest rate probability tool sets this likelihood still at only around 65%. Commentators are certainly warming to the idea, but most believe that it will be almost another year before a subsequent hike is carried out.
This may be underestimating the path of inflation, wage prices and - importantly – overstating Brexit concerns. Carney has repeatedly suggested that Brexit remains one of the greatest challenges to their forecast models, however, the price action in Sterling already belies a growing optimism, or acceptance, that the economic impact of the 2016 referendum is far less negative than suggested by the major players prior to the event. With a transition agreement in place, a move into the critical trade negotiations is a huge step forward even if it brings us to a position with the greatest potential for deadlock.
With headline inflation remaining high and now wage prices heading in the same direction, the UK's second hike in just over a decade will indeed come next time around. Furthermore, with a May hike enacted, the door will then open for a second hike of the year in Q4, an eventuality that the market is yet to price in. With Brexit concerns reducing on the growing optimism that a transition agreement will provide the time and space for a trade arrangement to be thrashed out, the prospect remains for Sterling to trend higher in the weeks and months to come.
We have been bullish on GBPUSD for more than a year now and even with such a consistent trend higher in the last 12 months, the pound remains historical cheap by nearly any measure. There will be times when negotiations with the EU falter, and with it Sterling will stutter, but with a focus on the policy outlook from the central banks and a long-term chart to hand, the medium-term future continues to look bright for the pound.
Samuel Leach, FX trader and Founder, Samuel & Co. Trading:
When the BoE begins to hike interest rates the main concern I see is the impact this will have on over indebted consumers. I have been paying close attention to UK unsecured consumer debt, which is currently at all-time highs of more than £200bn. Furthermore, the annual growth rate in UK consumer credit is 10% a year which is considerably higher than household income growth (2%), therefore a very concerning place to be. These are unsustainable levels now and an interest rate hike could tip these consumers over the edge. Particularly, those on interest rate tracker mortgages. This will then have a ripple effect on businesses as consumers rein in spending to pay off their debts.
For entrepreneurs it is damaging because funding is an issue as it is, let alone with higher interest rates as it will put off potential investors. The first thing businesses cut back on is risky investments and purchases, so entrepreneurs and small businesses will see the biggest brunt of it in my opinion. For the financial markets we should see strength come into GBP. That, combined with the soft Brexit announcement we had earlier last week could push GBP back towards 1.5 – 1.6 against the USD.
Markus Kuger, Senior Economist, Dun & Bradstreet:
The Bank of England vote to hold interest rates is not surprising, as recent figures indicate a moderation in inflationary pressures. However, with wage growth finally picking up, our analysis suggests that interest rates are likely to increase later in 2018, despite the tepid real GDP growth figures.
Based on our current data and analysis, we are maintaining a ‘deteriorating’ risk outlook for the UK but this could change to ‘stable’ depending on the outcomes of the EU summit this week. If the 28 EU leaders agree on the much-needed transition period until December 2020, the risk of a hard Brexit in March 2019 will drop significantly. That said, implementation risks remain high and the long-term future of EU-UK trade relations are still unclear. Against this backdrop, a careful and measured approach to managing relationships with suppliers, customers, prospects and partners is key to navigating through these uncertain times.
Jonathan Watson, Market Analyst, Foreign Currency Direct:
The Pound spiked up following the latest UK interest rate decision which saw GBPEUR and GBPUSD touch fresh levels as the recent improved expectations were realised. Whilst Inflation had fallen slightly lower than expected it remains above target and rising wage growth too has given the Bank of England a freer hand in raising interest rates.
Rising growth forecasts for the UK also add to the increasingly rosy picture for the UK, progress on Brexit with the agreement of the transitional phase has also added to the buoyant mood. Whilst the current stance of the Bank is for a rate hike in May any serious changes in economic data could derail that.
A rate hike in May is now very likely but with that looking so likely, the Pound may not move much higher. The next 6 weeks of economic data ahead of the decision on May 10th will now be pored over for any signs of either caution from, or indeed signs of further hikes down the line. It would seem likely that with the UK and global economy forecast to grow further in 2018 and 2019, the Bank of England will continue to need to manage rising Inflation as the economy grows.
In my role as a specialist foreign exchange dealer my clients have been quick to utilise the forward contract option to lock in on the spikes and moves higher for the Pound. Whilst the longer-term forecast has improved lately, the uncertainty over Brexit and the fact the UK remains behind other leading economies in the growth stakes, indicates a risk averse approach. Locking in the higher levels still remains the most sensible option to manage your currency exposure and volatility from the Bank of England and interest rate changes.
Robert Vaudry, Investments Managing Director, Wesleyan:
With two members of the Bank of England’s monetary policy committee voting to raise interest rates it is becoming more likely that at least one increase will take place this year, probably as early as May.
Whether the era of ‘cheap money’ has finally come to an end remains to be seen. Any rise will be welcomed by savers who will potentially see an increase in rates on saving accounts, but the cost of borrowing will increase too. Those on variable mortgages could experience higher interest rates for the first time and need to understand the financial implications this could have. However, it is important to remember that even with the interest rate rises expected, interest rates remain low by historical measures and below the rate of inflation.
It’s also important to not become complacent and we’d advise everyone to remain mindful that there may be uncertainty in the months ahead, especially as stock markets remain volatile.
If you have thoughts on this, please feel free to comment below and let us know Your Thoughts.
With the recent monthly purchasing managers index behind us, we can look forward to this week’s Bank of England meeting and quarterly inflation report. Below Adam Chester, Head of Economics at Lloyds Bank Commercial Banking, discusses what to expect on Thursday’s meeting.
When the Bank of England meets this week, it could prove to be one of the most important policy meetings of the year.
What makes tomorrow’s update of particular interest is that it includes the annual deep-dive into the supply side of the UK economy, which has important implications for the speed and extent of future interest rate changes.
By assessing how the economy is performing in relation to its potential, the Bank can form a judgement about how much slack remains - the greater the slack, the greater the scope for demand to rise without pushing up inflation, and vice versa.
The Bank will give its verdict on whether demand is above what the economy can sustainably produce – the so-called ‘output gap’ – as well as how quickly the economy’s supply potential can rise – the so-called ‘trend rate’ of growth.
Before the financial crisis, the UK’s trend rate was estimated to be around 2.5% a year, but by last year it had dropped to 1.5%, largely down to a fall in productivity which has been blamed on Brexit uncertainty.
The Bank will also need to make a crucial judgement on how much spare capacity, if any, remains in the labour market.
A lack of slack
In last year’s update, the Bank concluded that the weakness of pay growth at that time suggested the labour market was operating with a small degree of slack. This no longer looks the case.
Over the past year, total employment has risen by over 400,000 to a new high, and the unemployment rate has dropped further – from 4.8% to a forty-two year low of 4.3%.
The latter is now below the Bank’s previous estimate of the sustainable, or ‘equilibrium rate’ of unemployment, which it put at 4.5%.
It is possible that the Bank could lower this estimate further, but to do so would likely raise eyebrows, as regular pay growth has started to accelerate – rising from an annual rate of 1.8% to 2.4% since last spring.
The Bank will also revisit its assumptions for population growth, the participation rate (the percentage of the adult population in the workforce), and hours worked.
The ageing population, declining immigration and changes in taxation and benefits will all have a bearing on this.
Overall, the Bank faces a tricky balancing act.
Arguing the case
If it is to conclude that underlying inflation pressures are likely to be benign during 2018, it needs to argue that either (i) the supply side is improving, most obviously due to rises in productivity and/or an increase in the amount of available labour; or (ii) that, for the time being, the outlook for demand is sufficiently weak.
On both counts, we suspect the Bank could struggle.
Firstly, there are no obvious signs of an upturn in productivity growth and recent increases in wage growth suggest the tightening of the labour market is starting to bite.
Second, there is little sign of any significant weakness in demand, with recent indicators confirming the economy is holding up relatively well.
Given this, we suspect the Bank will conclude that any spare capacity in the economy is continuing to be eroded.
While it is likely to cite ongoing ‘Brexit uncertainty’ as an argument for maintaining a ‘gradualist approach’ to policy, the implication is clear.
In the absence of a clear slowdown in demand, the Bank may have to raise interest rates more quickly and more sharply than either we, or the financial markets, currently anticipate.
Below, Paul Richards, Chairman of Insignis Cash Solutions, explains why the end of the TFS will have adverse effects on savers and banks.
28 February 2018 marks the end of the term funding scheme (TFS), a source of cheap borrowing for banks since its launch in August 2016. This ability to borrow at a low repayment rate meant banks didn’t need to rely on retail deposits for funding; the resulting increase in liquidity reduced the need for banks to compete for savers’ cash, putting downward pressure on deposit rates.
When the scheme closes, the appetite for retail deposits will increase, prompting more competitive rates for savers. The longer term impact will be even more significant. Banks have four years to repay money to the scheme, and will increasingly need to rely on retail deposits during this time.
Failure to repay TFS loans is not an option. After 28 February, the clock starts ticking to pay back £100 billion and banks need to factor replacing these funds into their long term strategic planning. Banks are likely to focus on building up retail deposits as these funds are classified preferentially under regulatory ratio requirements and tend to be more ‘sticky’ long-term.
While we don’t expect instant access rates to improve dramatically straight away, we expect savers to be increasingly rewarded for longer terms savings products. For both notice and term accounts there should be a long term improvement in the market as banks work to replace the Bank of England liquidity.
We also have an increasing number of new bank entrants to the market seeking deposits. There are 20 plus challenger banks looking to enter the UK market, a big boost for competition. Then there is the relative robustness of the UK economy to consider – this combination of drivers will help to push rates higher and increase the options available to savers.
It’s likely we will see a 0.25-0.5% increase in longer terms savings rates over the next 12 months and potentially up to 1% over the next 24-36 months, which could leave a one year term account getting close to the 3% level.
