Watch out for the squeeze – the consumer price index jumped from 2.6% in July to 2.9% in August, the highest level since April 2012, as Bank of England Governor, Mark Carney warned that a sharp fall in migrant workers coming to Britain as a consequence of Brexit could push wages up and cause a spike in inflation in the short term. That’s likely to lead to another fall in real wages on the back of June’s 0.5% decrease, as nominal salaries lag prices, hitting Britons where it hurts most – their pockets.
Mark Carney and the Monetary Policy Committee (MPC) have made it clear that they expect to raise the interest rates at next month’s meeting, if the economy continues on its current path.
We believe the Bank and Mark Carney’s recent statements are primarily aimed at propping up Sterling to reduce imported inflation pressures…This strategy may include an actual 25 basis points hike in November thus bringing the policy rate back to where it was before the Brexit Referendum. Additional moves in 2018 do not appear warranted on the back of a slowing economy.”
Analyst Paul Watters, Standard and Poor’s
Homebuyers are set to suffer the most due to the prospect of an interest rate hike as early as November to ease inflationary pressures, which would result in higher monthly repayments on mortgages and for businesses which have variable rate loans.
The promise of higher interest rates has propelled the Sterling more than 5% against both the Dollar and the Euro over the past month, with the currency reaching two-month highs against the Euro and appreciating 9.64% against the Dollar since the start of the year. Although exporters have used the Pound’s strength to their advantage, we have also been importing more so still have a large trade deficit.
The cost of a five-year fixed rate loan has risen 36 bps in one month to 1.02%, while the cost of a ten-year fixed rate loan increased by 33 bps to 1.34%. The latest moves leave the five and ten-year rates up 28 and 20 bps respectively since the start of the year.
So, what does this mean for businesses/investors looking for new finance?
Securing a £5m loan over a five-year period is now £89k more expensive than it was a month ago. Similarly, the cost of securing the same amount for a ten-year period has gone up by £159k in one month. In other words, these swap / fixed rates do have a real impact on all of us.
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