In the biggest increase since 1997, the Bank of England this week raised interest rates by 50bp, to 1.75%. At the same time, the central bank warned that a recession is expected to begin late in 2022, and last for five quarters.
As the rate hike is a drama for the entire economy, we’ve gathered the key observations and opinions from experts across the fintech industry to take the pulse of how the sector expects the news to unfold.
Naresh Aggarwal, policy and technical expert at the Association of Corporate Treasurers observes that as most major businesses completed financing in the first half of this year, the latest hike will not affect them in the short term.
“Those planning to raise debt in the second half of the year will find it more difficult to do so – especially as the geopolitical environment is much more uncertain now. For those looking to raise debt for operational reasons, such as needing the funding to fund working capital , it may be more difficult to raise funding when needed rather than simply increasing cash levels.”
Aggarwal adds that from the treasurers’ perspective, interest rate rises in the UK form part of a general global picture and are unlikely to change how investment decisions are made. That is, “we invest in one country more than another. A consequence is that it can reduce the overall level of investment as the costs and thus the required rate of return on invested capital increase.”
Real impact on real-time payments
Craig Ramsey, head of real-time payments, ACI Worldwide, says financial leaders and the UK government are already scrambling to find solutions to combat a growing number of financial challenges. “While another rate hike adds fuel to the fire, real-time payments can address some of the challenges created by an increasingly challenging economic environment.”
Notice the savings as real-time payments could be giving to the UK economy, Ramsey adds: “The UK is missing a trick. We are outpaced by emerging nations in real-time payments modernisation, including India and Brazil. The UK Government must harness the potential of real-time payments to help ease today’s economic pressures. The benefits with real time can be maximized by structuring regulatory frameworks that are not only fit for purpose today, but also have the flexibility and adaptability to respond to developments in the future.”
Managing Millennial Investors
Andreas Diener, chief product officer for wealth at Avaloq, explains that the pace of interest rate increases is likely to be unsettling for millennial investors, most of whom have never experienced a rising interest rate environment.
“Most millennial investors entered the market after the 2008 financial crisis, an era characterized by rock-bottom interest rates. The impact of rising interest rates on millennials’ portfolios will be unknown and could lead to rash reactions focused on negating short-term pain […] Wealth managers need to convince their millennial clients to keep their heads straight and either stay the course for the long term or sensibly adapt their strategy to the new environment of high inflation and rising interest rates.”
Alistair Baxter, head of debt financing, Taulia, describes the rate hike as the Bank of England “baring its teeth” against an unwavering desire to control inflation – even in the face of a recession.
Although Baxter says the increase is no surprise, with “many in the market facing skyrocketing energy and input prices, significantly higher borrowing costs and flatter sales, it’s really going to be a testing period for businesses. Working capital remains the untapped source of funds that will facilitate survival and accelerate growth as we emerge from this period of economic uncertainty.”
Aggarwal observes that as treasurers want certainty, as it allows them to plan better and ensure that financial risk to the business can be managed effectively, high levels of inflation do not help. “It is important to remember that inflation affects different businesses and sectors in different ways. For example, pension liabilities have fallen while commercial assets will typically increase at levels higher than loan interest rates. For retailers, the challenge is how much they can absorb and how much is pushed to consumers. Reducing demand for high-end items as a result of belt-tightening is not a bad thing, but reducing demand for basics (if people can’t afford food etc.) is not.”
Samuel Fuller, director of Financial Markets Online, does not believe that the interest rate increase will guarantee a reduction in the inflation figures. “World events continue to wreak havoc, and with the US Federal Reserve raising interest rates at an even faster pace, the bank must walk a tight line between killing demand and continuing to import too much inflation due to a weak pound. The bank will also soon to sell its mountain of gilts, which is already causing the government’s borrowing costs to tick up. This may also have unintended consequences.”
Jeremy Batstone-Carr, European strategist, Raymond James, agrees with Fuller, arguing that “one would hope that the biggest single rate hike since 1995 would be the knockout punch in the fight against inflation, but there is little evidence that it will suppress underlying drivers that are currently driving up prices. A more patient approach would have been almost as effective, giving the country the best chance of avoiding a feared recession.”
Batstone-Carr observes that while markets have recently stopped “throwing their toys out of the pram” in response to policy tightening, suggesting they see better times ahead in the near future. . What is needed now more than ever is accommodative monetary policy, aimed at encouraging investment and giving us our best chance of tackling the drivers of inflation without ushering in a recession. Given today’s hawkish decision, that possibility may now be off the cards.”
What’s more, Fuller explains, is that predictions about how bad it’s going to get seem to grow increasingly worse, with credible forecasts that inflation will reach 15% early next year weighing heavily on sentiment. “The UK may not be as badly off as places like Turkey, where inflation is pushing 80% a year, but that will come as cold comfort as the energy squeeze pushes the UK into dark and uncomfortable territory in the new year. Frankly, it’s an economic time bomb, and prices only go in one direction.”
The cost of living crisis
Katie Pender, CEO of Elderbridge comments that the announcement makes grim reading and is likely to cause more pain for consumers. “It is now estimated that 5.3 million households will have no savings at all by 2024, double the current level. In addition, another 1.7 million will be left with less than two months’ income in the bank, making them susceptible to any unexpected expenses.”
“Mortgage rates will go up immediately, but savers are seeing a clear lag in terms of interest realized, plus with rampant inflation outstripping any returns, more and more consumers will find themselves in very tight financial positions through no fault of their own,” adds Pender . . “Unfortunately, the worst is yet to come as the IRS looks to curb inflation, so now is the time to work with customers, not blame them, and help drive solutions that work for all parties.”
While warning that the rate hikes could mean further increases in borrowing costs for mortgage holders, Krishnapriya Banerjee, a managing director in Accenture’s UK banking practice, said: “Clients will be hoping that this latest rate hike starts to be reflected in their savings accounts. also to try to ease the burden on already stretched household budgets.”
Banerjee continues that the extra pressure that current market conditions place on household finances has also brought the issue of financial literacy into sharper focus. “Just as we have done for physical and mental health, it is vital that protecting the UK’s financial health is a priority. Banks must ensure that customers have access to the right digital tools, knowledge and personal support to cope with the months ahead. Open and transparent communication to their customers is also key, not only to help the most vulnerable in the short term, but to help banks foster a resilient customer base that is more prepared for future economic turbulence.”
Oliver Chapman, chief executive of supply chain firm OCI said: “The cost of living crisis is bad, so the Bank of England is responding by making things even tougher for households. However, it could be that the bank’s latest rate hike is a step too far, and the full effect will be felt just as prices start to fall, making a bad situation worse. There are always time delays between an interest rate change and the full economic effect. So what the Bank of England does now will still affect the economy 18 months from now. And in 18 months, inflation could be much lower anyway.”
“Clearly,” Chapman continues, “the Bank was too late to raise rates. UK rates have risen by half a percentage point to 1.75 per cent. They were still at just 0.15 per cent as recently as the start of this the year. The bank should have started raising interest rates much earlier, and more aggressively, and then perhaps the top interest rate would have been much lower than it now seems likely.”
Shaun Port, managing director of savings and investments at Chase, notes that as well as the rate rise, what the bank signals about any future changes is likely to have a significant impact on both markets and UK households. “As costs continue to rise, it’s a difficult time for households to make long-term financial plans. Having greater flexibility and access to savings, without being penalized, can help everyone cope with difficult financial demands and navigate the months ahead.”