Bank of England chief says there ‘will be consequences’ of higher rates
The governor of the Bank of England said there “will be consequences” of higher interest rates on borrowers, as nearly one million mortgage holders could see their monthly repayments increase by about £500 in the next three years.
Andrew Bailey said at the press conference following the Bank’s latest Financial Stability Report:
It is going to have an impact clearly… that is part of the transmission of monetary policy, no question about that.
What we are seeking to do here… is balance having the transmission of monetary policy with – the two things that I would emphasise – the resilience of the banking system, and the ability to support customers and therefore manage the consequences of this.
But there will be consequences from increased interest rates I’m afraid because that, from a monetary policy perspective, is why we have to do it.
Key events
Lisa Abramowicz, who co-hosts Bloomberg Surveillance on Bloomberg TV and radio, noted:
US consumer prices rose modestly in June and registered their smallest annual increase in more than two years as inflation continued to subside, but probably not fast enough to discourage the Federal Reserve from resuming raising interest rates https://t.co/n6JBD0ylRe
— Reuters (@Reuters) July 12, 2023
Here in the UK, inflation is running at 7.9%. The Bank of England will be jealous.
Neil Shah, executive director at Edison Group, said:
UK policymakers and the BoE will be looking enviously across the pond as US inflation continues to moderate at a steady pace. The latest headline inflation figures drop by one percentage point, even lower than expected. We are now seeing levels last seen in 2021, and getting ever closer to the Fed’s 2% target. Even core inflation, which has been significantly more stubborn in subsiding dropped to 4.8% in June. Central banks view this as the clearest indicator for rate-setting policy, so the Fed will be relieved to see core prices moving in the right direction.
Nevertheless, core inflation remains high, and [Fed chief Jerome] Powell is likely to continue on his course to squeeze inflation by raising rates at the FOMC’s next meeting. The US labour market remains tight, with high employment numbers and consistent wage rises, while the country’s housing market is showing remarkable resilience – all adding to the expectations of a further interest rate hike in late July. Markets seem to have priced in the newest inflation data, and we don’t expect any major moves as a result of the latest figures.
Financial markets are happy following the US inflation slowdown. The UK’s FTSE 100 index has jumped 118 points, or 1.6%, to 7,397. Stock markets in Germany, France and Italy were between 0.7% and 1.2% higher.
US futures are pointing to a higher open on Wall Street in 45 minutes’ time.
Naeem Aslam, chief investment officer at Zaye Capital Markets, was quick to send us his thoughts.
Cold as ice—that is the number that comes to mind when you look at the US CPI data. This is the lowest number since the pandemic, and this is certainly good news for the economy, but it is important to keep in mind that this is still a transitory situation. But overall, traders are cheering this event, and while futures have moved higher, the dollar index has lost more momentum.
The price for gold has become more interesting and bullish on the back of the US CPI data, as traders don’t expect the Fed to chop more wood now. The bitcoin price has become more interesting as well, and we have seen a jump in prices.
Overall, we think this is the best news for the markets so far this year when it comes to the US CPI data.
US inflation slows to 3% in June
NEWSFLASH: Inflation in the US has slowed more than expected to 3% in June, the lowest rate since 2021.
The annual inflation rate fell from 4% in May, according to government figures.
Core inflation, which strips out food and energy costs that tend to be volatile, was also lower than expected at 4.8%, while economists had expected a rise to 5%.
The investor Jeroen Blokland tweeted:
Reuters economics reporter David Miliken has digested the Bank of England’s financial stability report in a series of tweets. He warns that aside from the mortgage crisis, the bigger problem is unsecured consumer debt, and that a significant minority of households are very stretched by their debts.
The Bank of England published its half-yearly review of the health of banks and borrowers. Big picture, no cause for alarm – the financial system is “resilient” and overall debt burdens on track to remain below pre-2008 levels.
But there are a number of caveats…
1/n— David Milliken (@david_milliken) July 12, 2023
First for mortgage holders:
– the average person remortgaging over the rest of this year will see payments rise by £220 a month
– but through to the end of 2026, for nearly a million households payments will rise by over £500 a month
2/n pic.twitter.com/BpJyAV45A2— David Milliken (@david_milliken) July 12, 2023
Many people with bigger mortgage bills are well-off – but not all.
Around 650,000 UK households will spend at least 70% of income after tax and other essential bills repaying their mortgage by the end of the year.
That’s 2.3% of households (vs 1.6% last year and 3.4% in 2007)
3/n pic.twitter.com/LIGRiRRx47— David Milliken (@david_milliken) July 12, 2023
But the bigger problem is unsecured consumer debt. Some 10% of people in Britain spend at least 80% of their income after tax, housing and other bills on servicing consumer loans, up from 9% last year.
Overall debt as a share of income is below pre-pandemic levels.
4/n pic.twitter.com/6wtxW2QaWu— David Milliken (@david_milliken) July 12, 2023
Back to the mortgage crisis. John Burn-Murdoch, columnist and chief data reporter at the Financial Times, tweeted:
The UK mortgage time bomb numbers are bad enough as they are, but they get really sickening when you think of them as an effective pay cut.
An increase of £500 in monthly payments (coming to 1m households by 2026) is £6,000 per year, which equates to about a *£10,000 pay cut* pic.twitter.com/UZWbWb2sos
— John Burn-Murdoch (@jburnmurdoch) July 12, 2023
Neil Lee, professor of economic geography at the London School of Economics, said:
Basically there is a generation (mine) who hit their thirties in an asset price bubble, had to buy houses at that price, and are now going to be hammered by interest rates / asset depreciation
— Neil Lee (@ndrlee) July 12, 2023
Simon French, chief economist and head of research at Panmure Gordon, tweeted:
Important footnote in today’s BoE Financial Stability Report. Debt Servicing Ratio on UK mortgages expected to go from 5.5% to 8% of household income but with <30% of households having a mortgage this will be more typically 16%, to above 25%. Recent Gilt market moves also… pic.twitter.com/5U8aNejjT5
— Simon French (@shjfrench) July 12, 2023
Wetherspoon’s sales jump as people seek cheaper food and drink
Joanna Partridge
The pub chain JD Wetherspoon has reported soaring sales in recent weeks, as cash-strapped consumers look for cheaper food and drinks amid high inflation and the cost of living crisis.
Wetherspoon’s, which runs just under 830 pubs across the UK and Ireland, said its sales had risen by 11% in the 10 weeks since the start of May, compared with the same period in 2019, before the pandemic.
Striking an optimistic tone, the company said its sales of beverages and meals were also up 11.5% compared with a year earlier, as the chain shrugged off concerns that its customers were tightening their belts.
The boost to its sales appears to have accelerated in recent weeks, after lauding a record Easter and successful series of May bank holiday weekends.
Pound hits 15-month high after banks stress tests
The pound hit a fresh 15-month high after all major UK banks passed the Bank of England’s stress tests.
Governor Andrew Bailey was pretty upbeat, saying:
The UK economy and financial system have so far been resilient to interest rate risk.
But he noted that the full impact of higher interest rates had yet to be felt. The central bank surprised markets (and the public) with a half-point hike to 5% last month, in an attempt to bring inflation down. Markets expect rates to reach 6% by December.
Bailey said that the latest labour market data showed signs of cooling, although wage growth is still too high.
Sterling rose as high as $1.2970, the highest since last April, but has since fallen back to $1.2920.
Estate agent Winkworth warns on profits
The UK estate agent Winkworth has warned of a drop in profits, after sales slumped amid rising mortgage rates. The shares fell as much as 15% and are now down more than 3%.
The company explained:
The sales market proved to be more challenging in the second quarter of 2023 as interest rates rose higher and faster than anticipated. Mortgage approvals, which in Q1 recovered from the low levels seen in Q4 2022, were reported below the levels seen in the first half of last year.
Property prices have held up reasonably well but transactions have slowed, leading to a high number of agreed sales being delayed to the second half of the year.
Sales revenues fell 20% in the first half of the year compared with the same period last year. Lettings revenues rose 11%, as rising numbers of people cannot afford to buy because of rising interest rates and are forced to rent.
As a result of the property sales slump, Winkworth expects half-year profits to be below last year’s level.
Costas Milas from the University of Liverpool’s Management School, professor of finance and accounting, is puzzled by the Bank of England’s latest stress tests for the banking sector.
The severe hypothetical stress scenario is a Bank rate peak at 6% together with a UK unemployment rate peak at 8.5% and a UK real GDP real start-to-trough of -5%.
Here is the puzzling issue: The post-1960 average Bank rate has been 6.33%, that is, higher (!) than what is used in the severe scenario. Equally important, the current Bank rate is only one percentage point below the severe scenario “territory”.
My feeling is that the severe scenario should have used a much higher (than 6%) Bank rate. Otherwise, one might be tempting to argue that by raising (as markets expect) the Bank rate (much) higher than its current level of 5%, we might inflict quite an economic pain…
Bank’s Cunliffe says number of households in distress will be ‘considerably smaller’ than in financial crisis
Earlier, Jon Cunliffe, the Bank’s outgoing deputy governor for financial stability (he retires in October), explained why household debt isn’t as big a problem as it was during the financial crisis of 2008-2009.
So there are some big differences between now and 2007. In 2007 inflation was not rising and interest rates were going down, whereas at the moment we’re seeing the opposite.
The big difference is that the amount of household debt that’s being carried is much lower now than it was at the time of the financial crisis so households aren’t really over-levered as they were before. And that’s one of the reasons why we think put households in distress whose debt service ratios, adjusted for inflation, will reach the levels where in the past you’ve seen distress – that proportion of households will be smaller than we saw in the financial crisis and considerably smaller.
Amid criticism of the Bank’s rate hikes, he said it needs to get inflation under control.
It’s clear that inflation hits the poorest of society worst and and that’s one of the key reasons why one needs to get it under control.
But if we’re thinking about mortgage arrears and the ability of households to pay, then I think the fact that households are carrying less debt than they were, and that’s in part because of the action that the Bank of England and the Financial Policy Committee took to put constraints on mortgage borrowing, that likely will leave us in a stronger position in terms of distress.
Bank of England chief says there ‘will be consequences’ of higher rates
The governor of the Bank of England said there “will be consequences” of higher interest rates on borrowers, as nearly one million mortgage holders could see their monthly repayments increase by about £500 in the next three years.
Andrew Bailey said at the press conference following the Bank’s latest Financial Stability Report:
It is going to have an impact clearly… that is part of the transmission of monetary policy, no question about that.
What we are seeking to do here… is balance having the transmission of monetary policy with – the two things that I would emphasise – the resilience of the banking system, and the ability to support customers and therefore manage the consequences of this.
But there will be consequences from increased interest rates I’m afraid because that, from a monetary policy perspective, is why we have to do it.
Andrew Bailey said there are some signs of the labour market cooling, referring to yesterday’s data.
He also said that low levels of unemployment are helping households cope with higher borrowing costs:
We have a much stronger labour market… It is helping a lot in terms of the stress that households are seeing.
He took aim at pay deals again, saying they are pushing up inflation.
The current level of pay increases are not consistent with inflation targets. That’s I’m afraid a fact of life and we we have to deal with that.
Sam Woods, head of the Prudential Regulation Authority, which oversees the UK banking and insurance sectors, said while small landlords with buy-to-let mortgages also face higher payments as interest rates rise, the Bank is not worried about their ability to keep up with payments. On average, their monthly repayments are set to go up by £275 by the end of 2025.
On small landlords, we are not very concerned by that from a financial stability point of view.
Here is Kalyeena’s story:
The UK’s largest banks are strong enough to weather a £125bn financial hit during a severe economic downturn, despite facing mounting stress from rising interest rates, the Bank of England said.
The central bank’s annual stress test of the country’s biggest lenders – which include NatWest, Barclays, HSBC, Lloyds, Standard Chartered, the UK arm of Santander, Nationwide building society and Virgin Money UK – determined that they would be able to continue lending to households and businesses even if conditions worsened.
While the Bank of England only tested interest rates rising to 6% – which is not far beyond current levels of 5% – the scenario also involved a deep recession where GDP contracts by 5%, unemployment doubles to 8.5%, and a housing crash in which prices fall by a third.
Stay connected with us on social media platform for instant update click here to join our Twitter, & Facebook
We are now on Telegram. Click here to join our channel (@TechiUpdate) and stay updated with the latest Technology headlines.
For all the latest Business News Click Here
