Things are starting to break Huw !

Last week I attended a Bank of England presentation in Belfast, where I got to listen to the bank’s Chief Economist, Huw Pill, deliver a presentation regarding the Bank’s latest policy on interest rates, and how they plan to get a handle on inflation.?

This was my first-time meeting Pill, and it was an interesting experience.?

As you can imagine he is a very accomplished public speaker,??someone I would describe as quite a serious character, professional, and very much a matter of fact kind of guy, who loves nothing more than a good chart.

?

Pill of course, is a member of the Monetary Policy Committee (MPC) who set monetary policy with a primary goal of meeting the 2% inflation target.??They tell us that this helps sustain growth and employment.?

?

At it’s meeting ending?10th?May 2023, just over two weeks ago, the MPC voted by a majority of 7–2 to increase Bank Rate by 0.25 percentage points, to 4.5%.??Mr Pill was one of the guys who voted to raise rates again, for the thirteenth consecutive time by the way.

?

The bad news for all of you reading this newsletter, and particularly anyone with debt, according to Mr Pill, rates are going to continue to rise again in 2023, with the markets (post that last MPC meeting), pricing in rates going to 5.5% before Christmas.?

2018 0.75%

2020 0.25%

2021 0.25%.

2022 0.75%.

2023 4.5%

?4.5Source: Bank of England Official Bank Rate History

You can see in the schedule above, interest rates in the UK over the last 10 years.??

This in itself is worth giving greater consideration, a fascinating table, but something that does jump out, from a trend perspective, is that rates tend to be fairly sticky.??For example, from 2008 to 2022, a whole 14 years, the base rate remained below 1%.

According to Huw Pill last week, the bank continues to be incredibly concerned about inflation, regardless of where it is coming from.?Based on this, it would be fair to conclude, what I have been saying on this platform now for the last few weeks, that we are now in a era, where the cost of borrowing money is going to be much more expensive.?

?

UK GOVERNMENT WAR AGAINST INFLATION

?

The UK Chancellor,?Jeremy Hunt is prepared to accept a recession if interest rate rises help curb inflation.

Last week, Hunt insisted in an interview with the FT,?the "only path to sustainable growth" is to bring down the cost of essential goods.

Asked if he was comfortable with further interest rate rises even if they risk pushing the U.K. into a recession, Hunt said:?"Yes, because in the end inflation is a source of instability."

"If we want to have prosperity, to grow the economy, to reduce the risk of recession, we have to support the Bank of England in the difficult decisions that they take," Hunt added.

The UK inflation rate dropped sharply to?8.7 percent?in April 2023, down from 10.1 percent in the previous month, however still quite along way from the target of 2% I would suggest.?

BREAKING POINT

I took the opportunity to advise Mr Pill last week, that it was clear to people like myself, who work in the financial markets, that things are now starting to break, as a direct result of the very monetary policy that him and his colleagues were unleashing upon us.??

When rates go up, particularly so quickly, then all kinds of things start to happen, and problems increase for business owners and anyone who has a mortgage, in terms of being able to meet the new higher costs of borrowing.?

?

To be fair to Pill, he did recognise this, but just like the Chancellor, it is clear that these people are going to keep raising rates, until they start to see the data come way down, much closer to the 2% inflation target.?

My advice to everyone is to keep paying attention to what is going on here, and in particular, how is this new interest rate environment going to impact you, your family, and your business over the next couple of years

Food for thought !

As ever, if I can help you or your business with anything in the debt or funding markets, please get in touch.?

Have a great week,

CD

Conor Devine MRICS,?has been working across the property, debt and funding markets for over twenty years, and is passionate about helping others in the industry overcome challenges and to reach their business goals.?

?