In the largest hike since 1997, the Bank of England this week raised interest rates by 50bp, to 1.75%. The central bank at the same time warned that a recession is expected to begin in late 2022, and last for five quarters.
As the rate rise is spells drama for the entire economy, we’ve compiled the key observations and opinions of experts across the fintech industry to take the pulse of how the sector expects the news will unfold.
Naresh Aggarwal, policy and technical expert at the Association of Corporate Treasurers observes that as most larger businesses completed financing in the first half of this year, the latest increase will not affect them in the short term.
“Those planning to raise debt in the second half will find it harder 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 finance working
capital, it may be harder to raise financing when needed rather than just to boost cash levels."
Aggarwal adds that from the perspective of treasurers, the UK rate rises form part of a general global picture and are unlikely to change how investment decisions may be made. That is, “do we invest in one country more than another. One consequence is that
it may reduce the overall level of investment as the costs and therefore the required returns on capital invested increase.”
Real impact on real-time payments
Craig Ramsey, head of real-time payments, ACI Worldwide, states that economic leaders and the UK government are already battling to find solutions to combat a growing number of economic challenges. “While another rise in interest rates adds fuel to the fire,
real-time payments can address some of the challenges created by an increasingly challenging economic environment."
Noting the savings that real-time payments could be providing to the UK economy, Ramsey adds: “The UK is missing a trick. We are outpaced by emerging nations in real-time payment modernisation, including India and Brazil. The UK government must tap
into the potential of real-time payments to help alleviate today’s economic pressures. The benefits of real-time can be maximised by structuring regulatory frameworks that are not only fit-for-purpose today, but also have the flexibility and adaptability to
react to developments in the future.”
Managing millennial investors
Andreas Diener, head product manager for wealth at Avaloq explains that the pace of interest rate hikes is likely to be unsettling to millennial investors, the majority of whom have never experienced a sustained rising interest rate environment.
"Most millennial investors entered the market following the 2008 financial crisis, an era marked by rock-bottom interest rates. The impact of rising rates on millennials’ portfolios will be unfamiliar and could prompt rash reactions focused on negating short-term pain [...] Wealth managers need to convince their millennial clients to keep a level head and either stay the course for the long term or sensibly adapt their strategy to the new environment of high inflation and rising rates."
Alistair Baxter, head of receivables finance, Taulia, describes the rate hike as the Bank of England “showing its teeth” toward an unwavering desire to control inflation – even in the face of a recession.
While Baxter says the increase is no surprise, with “many in the market facing skyrocketing energy and input prices, significantly higher borrowing costs and flatlining sales, it really is going to be a testing period for businesses. Working capital remains
that untapped source of funds that will facilitate survival and hasten growth, once we come out of this period of economic uncertainty.”
Aggarwal observes that as treasurers crave certainty, as it allows them to plan better and ensure financial risks 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 borrowing rates. For retailers, the challenge is how much they can absorb and how much gets pushed
to consumers. Reducing demand for top end items as a result of belt tightening is not a bad thing but reducing demand for core essentials (if people can’t afford food, etc) is not.”
Samuel Fuller, director of Financial Markets Online, does not believe that the rate hike will guarantee a reduction on inflation figures. “World events are still causing havoc and, with the US Fed raising rates at an even faster pace, the Bank must walk
a tightrope between killing off demand and continuing to import too much inflation due to a weak Pound. The Bank is also soon to start selling off its mountain of gilts, which is already causing government borrowing costs to tick up. This could have unintended
Jeremy Batstone-Carr, European Strategist, Raymond James, agrees with Fuller, arguing that “one would hope that the biggest single rate rise since 1995 would be the knockout punch in the fight against inflation, but there is little to suggest it will supress
the underlying drivers currently driving up prices. A more patient approach would have been almost as effective, and giving the country its best chance of avoiding a much-feared recession.”
Batstone-Carr observes that while markets have recently stopped “throwing their toys out of the pram” in reaction to policy tightening, suggesting they see better times ahead in the near future. . What’s 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, this opportunity may now be off the cards.”
What’s more, Fuller explains, is that predictions around how bad it’s going to get seem to grow steadily worse, with credible forecasts that inflation will reach 15% early next year weighing heavily on sentiment. “The UK might not have it as bad as places
like Turkey, where inflation is pushing 80% a year, but that will come as cold comfort when the energy squeeze pushes the UK into dark and uncomfortable territory in the new year. Frankly, it’s an economic time bomb and rates are only going in one direction.”
The cost of living crisis
Katie Pender, managing director at Elderbridge comments that the announcement makes for grim reading, and will likely bring more pain on consumers. “It’s now estimated that 5.3m households will have no savings at all by 2024, twice the current level. Plus,
a further 1.7m will be left with less than two months of income in the bank, making them susceptible to any unexpected outlays.”
“Mortgage rates will go up instantly yet savers see a clear lag in terms of realised interest, plus with rampant inflation outstripping any returns, more and more consumers will be finding themselves in very tight financial positions through no fault of
their own,” adds Pender. “Sadly, the worst is yet to come, as the fiscal authorities look to curb inflation, so now it’s time to work with customers, not blame them and help drive solutions that work for all parties.”
While warning that the rate increases could mean further hikes to borrowing costs for mortgage holders, Krishnapriya Banerjee, a managing director in Accenture’s UK banking practice, states: “Customers will be hoping that this latest interest rate hike starts
to get reflected in their savings accounts as well, to try and ease the strain on already stretched household budgets.”
Banerjee continues that the added pressure that current market conditions are putting on household finances has also brought the issue of financial literacy into sharper focus. “Just as we’ve done for physical and mental health, it’s imperative that protecting
the UK’s financial health is made a priority. Banks must ensure that customers have access to the right digital tools, knowledge, and personalised support to handle the months ahead. Open and transparent communication to their customers is also key, to not
only aid the most vulnerable in the short-term, but help banks foster a resilient customer base that is more prepared for future economic turbulence.”
Oliver Chapman, CEO of supply chain firm OCI states: “The cost of living crisis is hurting, so the Bank of England reacts by making things even tougher for households. However, it may be that the bank's latest rate hike is a step too far, and the full impact
will be felt just as prices start to fall, making a bad situation worse. There are always time lags between a change in interest rate and the full economic impact. So what the Bank of England does now will still be affecting the economy in 18 months. And in
18 months, inflation may be a lot lower anyway.”
"Clearly,” Chapman continues, “the bank was too late in increasing interest rates. UK rates have been increased by half a percentage point to 1.75 per cent. They were still at only 0.15 per cent as recently as the beginning of this year. The bank should
have begun increasing rates much sooner, and more aggressively and then maybe the peak interest rate would have been much lower than now looks likely."
Shaun Port, managing director for savings and investments at Chase notes that in addition to the rate rise, what the Bank signals about any future changes is likely to have a significant impact on both the markets and UK households. “As costs continue to
increase, it’s a difficult time for households to make longer term financial plans. Having greater flexibility and access to savings, without being penalised, can help everyone to cope with difficult financial demands and navigate the months ahead.”