Last week, the Bank of England’s Monetary Policy Committee voted 8-1 to keep interest rates at the historic low of 0.25%. Markets had been anticipating a 9-0 decision and minutes reveal that several of those who voted to retain the low rate are seriously considering voting for a rise in the near future. What are the forces that will determine when the Bank raises rates – a move that would push up borrowing costs, strengthen the pound, and stave off inflation?
The international context shows a general trend of tightening monetary policy. The US Federal Reserve recently increased rates by a quarter of a percentage point, with strong hints that further rises are on the way, and the European Central Bank looks to be pulling back on quantitative easing after its President, Mario Draghi, said the “sense of urgency” of the Euro crisis was no more. This reflects positive news about the global economy: employment, trade and growth are finally recovering following the Great Recession, which was ultimately the cause of the era of loose monetary policy. This is true in Britain as well (although investment and productivity remain low), and with inflation becoming a fear again, the Bank has less reason for setting ultra-low interest rates.
However, the UK economy faces a unique unknown, in the shape of Brexit. With Theresa May on the verge of triggering Article 50, her negotiations with Europe, and how British businesses and consumers react, will play a big role in determining the Bank’s decisions. The risks are not all one way. The anticipated blows to trade and employment, particularly if, as the government is preparing us for, Britain ends up with tariff barriers between it and the Single Market, would justify looser monetary policy to stimulate the economy. However, a weak deal with the EU could also hit the value of the pound (remember what happened immediately following the referendum). Raising interest rates would defend the currency, and reduce the risk of high inflation associated with such a fall.
Given that a future UK-EU trade deal, should there be one, is unlikely to be complete for several years, in the short-term the Bank will be looking at how markets, businesses and consumers react to the post-Article 50 negotiations, which will focus on the ‘divorce terms’ before a new trade deal. Constant bad news from British negotiators in Brussels could only damage confidence, whilst cordial negotiations that point to a mutually beneficial trade agreement to come will bolster it. (The results of French and German elections, determining May’s negotiating partners, will be key here.)
Business confidence is relatively low, with a recent poll finding 44% of UK businesses admitting they were unprepared for Brexit, and only 26% backing the government’s negotiating strategy. Consumer confidence, according to most polls, is also down – but this has not yet been reflected in economic data. In fact, large shocks to consumer spending and business investment that were anticipated post-referendum have not yet occurred.
What does this point to for the Bank? It is likely to remain cautious for now, but if growth figures remain strong and the pound fails to recover, a rise this year is likely. The fundamental fact for those considering investment is that rates cannot go any lower – borrowing costs will only go up if you hold off. If you have confidence in your project and the global economic recovery, there’s no better time than the present to take advantage of low borrowing costs.
This article was written by Matthew Dailly, Managing Director of specialist bridging loan company Tiger Bridging Ltd.
About Tiger Bridging:
Tiger Bridging is a specialist bridging finance provider with over a decade in the market. They provide short term property funding solutions across the whole of the UK, offering bespoke and flexible lending terms.
Their funding is free from the restrictions imposed by larger institutions or the mainstream lenders. Their small stable of valued and fast-moving investors, complemented by a select group of hedge funds, provide a steady and reliable flow of capital to clients. Their culture is bespoke and their attitude is proactive. If the deal makes sense, they can get the funding, regardless of the credit status of the client.
Company Name: Tiger Bridging Ltd
Contact Person: Matthew Dailly
Phone: 0207 965 7261
Address:Kemp House 152 City Road
Country: United Kingdom