Why the time is right for the Bank of England to hike rates
As the Monetary Policy Committee (MPC) prepares to assemble for next week’s August meeting, many sceptics will be feeling that familiar sense of ‘here we go again’. Having dropped stronger-than-average hints that there would be a rate hike back in May, the Bank of England opted to hold fire as a stream of negative Q1 economic data piled in at the 11th hour.
With growth of just 0.1 per cent reported for the three-month period (at the time – since upgraded to 0.2 per cent), Mark Carney and his fellow doves on the MPC at least had some justification for their apparent last-minute change of heart. Nevertheless, the Governor has since expressed his ‘greater confidence’ that weak Q1 performance was down to the so-called Beast from the East, and that the economy is on the up. Such a school of thought has been backed up by the numbers too.
Growth for Q2 looks set to be a much-improved 0.4 per cent according to the CBI’s growth indicator, retail sales have rebounded, Britain’s job machine has pushed employment levels to new record highs and the service sector remains a powerhouse. Vindication, and a reason to press on with a base rate increase, you might think? Not so fast…
The inflation/wage conundrum
Last week, the pound plummeted as news filtered through from the ONS that inflation for June came in 20 basis points lower than expected at 2.4 per cent. Suddenly, from being rated as odds-on, the market deemed a rate hike highly doubtful – despite the fact that such an inflation rate still comfortably exceeds the Bank’s ongoing target of 2 per cent.
The blow was compounded by news on wage growth, which, despite an employment rate of almost 76 per cent, was reported as falling for the second month in a row. It defies one of economic theory’s pillars – the Phillips curve – which states that as the employment market tightens, so too wages must rise as the demand for workers increases (and vice versa). Yet despite a steady trend of reduced unemployment in the UK over the past few years, significant pay rises have been elusive for the majority of the workforce. There are a number of theories attempting to explain this, but the fact remains that the post-recession squeeze on households continues to endure.
And it is with this in mind that many experts believe Carney and Co will once again change tack next week and show savers the red card. Yet it is our profound hope that this will not be the case.
Now or never?
At the last meeting in June, chief economist Andy Haldane joined regular hawks Michael Saunders and Ian McCafferty to leave the vote more delicately poised at 6-3 in favour of holding. So, it will just need two other members to switch sides for rates to reach their highest level since March 2009. However, McCafferty will be leaving his post in September, and it is believed that his replacement, Jonathan Haskel, will likely err on the side of the doves in future votes. Yet it isn’t just a personnel change which adds to the imperative of this summer’s rate decision. From a purely economic standpoint, the question becomes ‘if not now, then when?’
The economy, on balance, has gained momentum, and even the issue of Brexit uncertainty is questionable as a deterrent for pulling the trigger. Most people expect an orderly withdrawal agreement of some kind to prevail, but even if this isn’t the case, having greater headroom in the event of a downturn is essential for any central bank.
And while it may be a blow for some – particularly those with variable rate mortgages – the reality is that there are far more savers in this country than borrowers, and it is high time for some rebalancing. Let’s also maintain perspective about the impact if rates were to go up by 25 basis points. In historical terms, that is not very much, and a base rate of 0.75 per cent is still near record lows for the UK. November’s rate hike is proof that borrowers, on balance, should be able to cope too, with there being an absence of reports that this decision had material, widespread negative ramifications on household debt. On the flip side of the coin, it could put the wind in the sails of savers who continue to see their money fall in real terms.
The peer-to-peer lending perspective
Our neutrality in terms of the way we view borrowers and lenders is not affected in expressing hope that rates increase next week. We do not have any skin in the game in terms of profitability; rather it is our belief that a recalibration is overdue. Although susceptible to market forces, the rates we set for borrowers (and lenders) are not directly affected by base rate movements. Indeed, borrowing costs for our customers will remain competitive regardless, given our lean business model and new initiatives to deliver instant, affordable credit. Our lenders, in turn, could expect to see gains as demand for our loans rises.
Yet it isn’t just our customers who stand to benefit. The long-term health of the UK economy is close to our heart, and it is our belief that subsisting on near-zero interest rates is a long-term plan which is bound to come unstuck at some point. Even in a mixed economic climate still bearing the scars of the financial crisis, there are surely more reasons to dip a toe in the water than not. And in such imperfect times, it should be a strong enough case for the Bank to act. If they let this opportunity slip by, it will deliver yet another hammer blow to disgruntled savers – and quite possibly the MPC’s credibility too.
The 2019 ISA season is now in full swing, and it's as good a time as any to focus on financial planning - and, within that, looking ahead to your retirement years to ensure financial security.
The Lifetime ISA (LISA), announced in 2016, would prove to be one of George Osborne’s last flagship gestures to UK savers and investors as Chancellor, eventually launching against a backdrop of anti-climax a year later in April 2017.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Loan underwriting is the process that we undertake to analyse all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets our minimum loan criteria. As part of that process all data is verified, analysed and summarised to paint a picture of each applicant.
When you earn interest from a regular bank savings account, for example, the bank automatically deducts basic rate tax (currently 20%) before paying your interest. With interest earned from peer-to-peer lending, tax is not deducted automatically so lenders will need to declare their income to HMRC.
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