Speaking at Leeds University Business School at the start of the week, Broadbent warned the inflation hike will come as regulator Ofgem is likely to increase the UK’s price cap in April of next year.
“Despite relatively weak growth over the past two years as a whole, domestically and globally, inflation has risen very significantly. In this country it was over 4% in October,” Broadbent said, “In the spring of next year, when the next rise in the Ofgem cap on gas and electricity bills comes through, it will probably climb comfortably through 5%, a long way north of the MPC’s 2% target.”
In October, UK inflation stood at 4.2%. Due to a rise in fuel and energy costs, this is its highest level in a decade and comes in at more than double the BoE’s 2% target. Broadbent called the current economic situation an “extremely challenging period for monetary policy.”
The Bank of England has revealed the final design of the new £50 polymer banknote featuring mathematician and computer pioneer Alan Turing.
Turing will appear as the main image on the banknote, with actor and comedian Stephen Fry and science author Simon Singh to reflect on it today.
The £50 note is the last UK banknote to transition from paper to polymer, following the minting of the Churchill £5, Austen £10 and Turner £20.
Turing is best known for his work at Bletchley Park during the Second World War, which accelerated Allied efforts to crack German Naval messages enciphered with the Enigma machine and is credited with shortening the war and saving lives. He also played a pivotal role in the development of early computers at the National Physical Laboratory and the University of Manchester.
Despite his accomplishments, Turing was not celebrated during his lifetime. He was convicted of “gross indecency” in 1952 after admitting to having a sexual relationship with a man. Two years later, at 41, he committed suicide.
Bank of England governor Andrew Bailey said in a statement: “There's something of the character of a nation in its money, and we are right to consider and celebrate the people on our banknotes."
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"[Turing] was also gay, and was treated appallingly as a result. By placing him on our new polymer £50 banknote, we are celebrating his achievements, and the values he symbolises," Bailey added.
The new note will go into circulation on 23 June, 99 years to the day after Turing’s birth. The public can continue to use £50 notes for now; notice will be given six months ahead of the date when the paper £50 is withdrawn.
The Bank of England has launched a new round of stimulus into the UK’s lagging economy, dedicating £150 billion towards the buying of government bonds.
The Bank of England’s Monetary Policy Committee (MPC) voted to expand “quantitative easing”, its programme of buying government bonds on the secondary market, by a further £150 billion, the Bank announced on Thursday. It will maintain a stock of corporate bonds worth £20 billion.
The MPC also voted to maintain its interest rate at the record low level of 0.1%. Both decisions were made unanimously by the 9-person body.
With the latest expansion of quantitative easing, the size of the Bank’s asset purchase programme to £895 billion. The expansion also goes beyond analysts’ expectations, with most having predicted an increase of only £100 billion in the Bank’s asset purchase facility.
The decision comes immediately ahead of a second England-wide lockdown, which is set to begin on Thursday and last for a month. Pubs, restaurants and non-essential retailers will be closed during this period, which will likely have a widespread negative effect on the UK economy.
Though the Bank predicted 5.4% growth for the UK economy in Q4 in its August forecast, it now expects the economy to contract by 2%. Its forecast for annual growth has also been slashed; the MPC now expects GDP to fall b 11% for 2020 overall, a greater decline than the 9.5% contraction it predicted in August.
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In its release, the MPC said that it expected GDP to rebound by 7.25% in 2021. It added that it “stands ready to take whatever additional action is necessary” to increase inflation and shore up the economy.
During a webinar held on Sunday, Bank of England governor Andrew Bailey said that interest rates below zero were generally most effective during periods of economic recovery, according to the BBC.
“Our assessment of negative interest rates, from the experience elsewhere, is that they probably appear to work better in a more wholesale financial market context, and probably better in a nascent economic upturn,” Bailey said during the event, adding that it was best for policymakers to act aggressively in the face of uncertainty rather than embracing caution.
Also during the webinar – hosted by the Group of Thirty, an economic and banking panel – Bailey said that he expected Q3 economic output to be 10% lower than at the end of 2019, though he noted that the influence of COVID-19 meant that “the risks remain very heavily skewed towards the downside.”
The governor’s comments added to speculation that the BoE may soon move interest rates below zero. If this were to occur, the UK would be following the example of countries like Denmark, Switzerland and Japan, which have adopted negative interest rates in the past to spur economic activity.
While the BoE has sought to downplay expectations that interest rates might fall below zero, stating that the measure was merely an option was available and that they had “no plans to use it imminently”, the bank’s Monetary Policy Committee has gone on record as having discussed the viability of negative interest rates, and the BoE has more recently sent a letter to UK banks enquiring about their preparedness for sub-zero rates to be adopted.
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In late March, the Bank of England cut interest rates from 0.75% to 0.25%, and finally to 0.1% -- their lowest level in history. Rates have remained unchanged since then as the UK continues to weather the economic impact of the COVID-19 pandemic.
The BoE’s Monetary Policy Committee will next meet on 5 November, where they will decide to either alter current interest rates or leave them unchanged.
The Bank of England (BoE) has announced plans to pump an additional £100 billion into the UK economy to aid the country’s recovery from the COVIID-19 crisis.
The Bank’s nine-member Monetary Policy Committee voted 8-1 on expanding its government bond-buying “quantitative easing” programme to £745 billion, up from £645 billion. The move was largely predicted by economists, who estimated an increase of £100-150 billion.
The MPC also voted unanimously to maintain interest rates, which currently stand at a record low of 0.1%.
In its statement on the new policy decisions, the Bank noted that there are reasons to be optimistic about the state of the UK economy amid the pandemic – particularly the lower-than-expected fall in GDP during Q2 of 2020 – though it added that the outlook for the UK and world economy remains “unusually uncertain”.
“There is a risk of higher and more persistent unemployment in the United Kingdom,” the statement reads. “Even with the relaxation of some Covid-related restrictions on economic activity, a degree of precautionary behaviour by households and businesses is likely to persist.”
“Inflation is well below the 2% target and is expected to fall further below it in coming quarters, largely reflecting the weakness of demand.”
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.
Analysts had originally predicted that the economy would continue to flatline at 0.1% growth, all the way into November 2019, as had been in previous months. However, the Office for National Statistics (ONS) says the MoM drop happened as a consequence of fall shorts in the production and services sectors. A fall in the pound has consequently led to overall pessimism when it comes to a pending recession.
31st January is the official Brexit deadline, and somehow the UK has managed to avoid recession, but slow growth is pushing the UK in this direction.
In an interview with the Financial Times, Gertjan Vlieghe, of the BoE Monetary Policy Committee, said he would vote for lower interest rates if data doesn’t show the economy picking up. Markets commentators also believe increasing hints that the Bank of England will cut interest rates is likely to prompt investors into overseas financial assets.
Nigel Green, chief executive and founder of deVere Group said: “This is the third senior Bank of England official within a week who has hinted that a rate cut could be imminent.
“In direct response, the pound has come under pressure, as you would expect when relative interest rate expectations change, and it has surrendered its $1.30 level.”
He continued: “The Bank appears to be confused about which risk to fear most.
“Is it a recession and deflation, caused by a no-deal Brexit at the end of this year and decreasing corporate investment over last few years?
“Or is it an overheating economy and inflation caused by a wave of relief if an EU trade agreement is signed that offers minimal disruption to business, combined with a splurge of government borrowing to pay for the Prime Minister’s increased spending plans.”
Commercial finance intermediaries are divided on Brexit. One out of four respondents consider it a key challenge, while one fifth believe that it will bring new business opportunities. However, commercial finance intermediaries have a positive future outlook. 77% of respondents believe that the number of loans they broker will increase; more than half of these even go so far to say that they believe it will rise by a lot.
According to recent statistics from UK Finance, conducted with the support of industry organisations NACFB and FIBA, UK lenders approved over 290,000 loans and overdrafts to small and medium-sized businesses (SMEs) in 2018, worth £28 billion in total. Commercial finance intermediaries, including brokers, accountants and business advisers, are often the invisible hand in these transactions. They play a crucial role in helping UK businesses source the right funding from all the different options offered.
However, despite the healthy size of the SME loan market in the UK there is still a £22 billion funding gap, with many businesses struggling to obtain capital for their needs , according to the Bank of England. What’s more, recent stats from the British Business Bank highlight the importance of commercial finance intermediaries stating that businesses receiving external support when looking for funding are 25% more likely to become high-growth companies.
Commenting on the survey findings, Niels Turfboer, managing director at Spotcap, said: “Commercial finance intermediaries are an important part of the SME funding jigsaw. The survey insights show that there is a lot of potential for them to help fill the £22 billion funding gap. The more adaptable and open-minded to change intermediaries – and lenders – are, the better and faster they can compete and grow their business.”
Adam Tyler, the executive chairman at FIBA, the Financial Intermediary & Broker Association, adds: "We benefit hugely from such a wide range of lenders and to know that SMEs are still not aware of the choice is very disappointing. My own research has revealed similar shortfalls and the more we can do collectively, the more small businesses can get the funding they require."
Graham Toy, CEO of the National Association of Commercial Finance Brokers, responded to the findings: “The research chimes with our own view of the commercial finance broker’s role in supporting and advising business borrowers. Brokers have a positive outlook partly because they remain instinctively agile, with many of them having weathered the unpredictability of a post-2008 world.”
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.
