Fintech reaction: Bank of England raises interest rates to 4.25%
The Bank of England has today raised interest rates to 4.25% which is the 11th consecutive rise; the highest it has been for 14 years and also the highest since the 2008 financial crisis. The base rate has been raised after an unexpected jump in inflation last month, thought to be brought on by fruit and vegetable prices, and will see the cost of variable and tracker mortgages rise but savers rates may improve.
However, all eyes will now be firmly on when the Bank of England next meet in May and the quarterly forecasts for the UK economy and inflation could mean a pause in rate rises. FF News asked a range of experts across the sector their thoughts on today’s news.
Michael McGowan, Managing Director, Bibby Foreign Exchange at Bibby Financial Services: “The fight against inflation intensifies as the UK follows the ECB and Fed in raising interest rates by a further 0.25%. A move that wasn’t necessarily expected at the start of the week given the instability in the banking sector following the issues around Silicon Valley Bank and the forced marriage of Credit Suisse and UBS. But yesterday’s surprise rise in inflation has brought into sharp clarity the sense of nervousness felt by the markets, and left the Bank of England with little option, but to use the only tool they have available to dampen the UK’s inflation.
“Today’s MPC decision may well have been a necessary evil to protect UK’s weakened economy, but it won’t feel like that in the short-term for small businesses struggling to maintain profitability. Higher interest rates will squeeze consumer spending and raise borrowing costs for businesses. The impact on the Pound should also be closely monitored by SMEs trading internationally as currency volatility remains one of the only certainties in today’s unsettled outlook. Robust foreign exchange strategies will be critical for SMEs to retain profit margins in 2023.”
Commenting on interest rates rising to 4.25% and the UK being in a potential economic danger zone, Charles White Thomson, CEO at Saxo UK, said: “The UK is in an economic danger zone. I am an advocate for bold plans which will unlock the UK’s potential and to break the high tax and low growth loop, but the status quo is increasingly painful and uninspiring, and this should not be about celebrating recent monthly GDP growth of an anaemic 0.3% and the avoidance of a technical recession. The UK continues to underperform its key counterparties and have underserved the majority and their aspirations. Change is required.
“As opposed to talking of the Chancellor and Government, I prefer to continue referring to the UK as a PLC. Instead of Prime Minister we have a Chief Executive Officer and for the Chancellor, a Chief Financial Officer. My resounding conclusion from the UK PLC’s recent financial statement – or budget – is that the management team are in an unenviable position in that there is little wiggle room for large change. The UK PLC is effectively in a financial straitjacket with constraints including: £2.4 trillion public debt and all the servicing costs this entails, tax to GDP levels approaching record highs or 37.5% and corporation tax moving to 25% from 19% for financial year 2023/24. Financial outlook statements for generations of UK PLC management have concentrated on the status quo as opposed to a more dramatic plan to seriously kick start growth, confidence, and the all-important upside this brings.
“We have an advantage in that UK PLC is the sixth largest global company or economy in the world with all the scale and reach that this brings. This is about a bold and large plan to ensure that we deliver on its full potential and unleash the prosperity that a large part of the UK shareholders want. The alternative to a bold and wide changing economic plan, which is not purely based on industrially low interest rates and quantitative easing, is continued stagnation and underperformance. This will not be easy, but the alternative is to sell out the next generation which should never be a consideration.”
Susannah Streeter, head of money and markets, Hargreaves Lansdown: ‘’A banking curve ball has been thrown into the Bank of England’s already tricky juggling act, but for now the eye of policymakers is still firmly trained on catching inflation and bringing it under control. The hotter than expected temperature of consumer prices in February, and the tight labour market are cause for concern, amid worries inflation could still become embedded in the economy. It wasn’t a unanimous decision though, with the Monetary Policy Committee split on what to do, given how rapidly the sands have been shifting. The pound has climbed higher above $1.23 adding to gains already made amid widespread expectations of this rate rise.
The knock-on effects of the banking scare are still hard to determine, and with lending criteria expected to be tightened and loans set to be harder to come by, a forecast deterioration in financial conditions is likely to be the equivalent to further interest rate rises in the months to come. Inflation was already expected to drop sharply by the end of the year to around 2.9% and if consumers and companies find it harder to access credit, it’s likely to be a fresh disinflationary force. So, in May policymakers are expected to press pause on rate hikes, as the lag effect of tightening across the economy comes into play.’’
Will Marwick, CEO at IFX Payments says: “The Bank of England has acted quickly to increase interest rates in response to this week’s shock inflation result, but many will question whether closing the stable door after the horse has bolted will do enough to tackle runaway prices. Foreign exchange markets are facing a busy week, and businesses with international operations will have to think carefully about how a stronger pound will impact their decision making. It’s at times like this that it’s crucial for companies to understand their foreign exchange exposures, and have a well-defined risk management strategy to mitigate the impact of currency fluctuations.”
Tommaso Aquilante, Associate Director of Economic Research at Dun & Bradstreet: “Stubborn headline and core inflation in February lead the Bank of England to press ahead with rate hikes. There are however good reasons to think that inflation will drop sharply in late 2023 to reach a new and happier medium. Booming energy prices and supply chain bottlenecks that contributed to the surge in inflation in 2022 are now gradually subsiding, and the steep price increases experienced last year won’t factor into this year’s inflation calculations.
“It’s worth keeping in mind that even if inflation drops to 2.9%, in line with OBR’s prediction, inflation would still be an eye watering 6% or higher year on year. This in turn will continue to have a negative impact on households’ finances and UK businesses’ purchasing power, and put pressure on businesses costs of the course of the year. In fact, more than a third (37%) of businesses we surveyed asserted that the overall cost of doing business this year would be a huge challenge.
“Businesses are going to have to focus on how they can remain resilient, productive and competitive as this turbulent period continues. Business liquidations are on the rise, costs remain high and financial conditions continue to tighten. This is where quality data insights can be useful to assess both risk and growth opportunities. Doing so can provide a competitive advantage and bolster business resilience.”
Commenting on the BoE’s decision to raise rates by 0.25% to 4.25%, Marc Cogliatti, Head of Global Capital Markets at Validus Risk Management, said: “As widely expected, the Bank of England raised rates by 0.25% at today’s meeting, taking the base rate to 4.25% — its highest level since 2008. The decision comes in the wake of a higher-than-expected UK CPI reading, which reaffirmed the dilemma facing the MPC. On the one hand, they want to avoid heaping undue pressure on the UK consumer at a time when everyone is having to overcome the rising cost of living. But on the other, the committee needs to ensure that inflation does not escalate further, therefore adding to people’s woes.
Although another 25 bps hike is fully priced into the market by June, there is little expected beyond there. In our view, this underestimates the risk of rates having to go higher in the months ahead to avoid inflation expectations becoming further embedded and CPI spiralling further out of control. The FPC’s assessment is that the banking system is ‘resilient.’ If the MPC are not concerned about the banking system, it is a further reason why they might feel comfortable raising rates again in the months ahead.”
Robert Pasco, CEO and Co-Founder of Plend comments: “I fear many financial institutions will use this interest rate increase as a green light to hike prices further at a time of national crisis, with people having to choose between heating and eating.
“Despite recent global shocks in relation to Silicon Valley Bank and Credit Suisse, this increase in the BoE base rate would have come as no surprise to most banks and lenders which have already factored in a short-term increase in interest rates in the UK.
“Any knee-jerk increase is tantamount to profiteering at the expense of the great British public. This is reflective of the opportunism that we have already seen by energy companies and supermarkets, which have been boosting profits during the cost-of-living crisis.
“I strongly urge all UK financial institutions to consider their customers’ current financial circumstances before pushing on a further rate hike after today’s announcement. During a time of extreme financial hardship across the UK, the ability to access affordable credit is crucial. If this base rate hike is passed on to consumers, this will make it difficult, if not impossible, for many to meet other cost-of-living increases as well.
“As of today, Plend has introduced a hard interest rate cap ensuring our customers are protected from any further rate hikes and have the support they need long-term.”
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