The Bank of England has hinted this week at a rise in interest rates. Tony Shakesby and accountant for 328 Group CFO and a banking and HBOS finance specialist, looks into the implications.
This week, the Bank of England hinted at a possible interest rate increase, after members of its MPC said they were proposing a ‘wait-and-see’ stance on the future of borrowing costs.
It could mark the first rise since 2007. Tony Shakesby, the CFO of Carey London and a London-based business and finance advisor, believes the timing of the response from the bank is difficult.
“It comes on a day that the Bank’s nine members of the MPC gave the unanimous vote to have rates remain at 0.5%. Martin Weale, a leading MPC member, gave rise to caution, saying the bank should be on alert of rising productivity and falling unemployment, meaning upward wages needs some pressure also,” says the 328 Group head.
The Bank’s governor Mark Carney has heightened speculation in his recent Mansion House speech, indicating that the cost of borrowing could rise sooner rather than later. “Some members believe the policy decision to be more balanced with a vote rate of 9 to 0.
“There is advantage in giving the bank more time to decide. However, if the decision comes too late, the bank may leave business and finance institutions – as well as consumers – in a mad rush before Christmas.”
Tony Shakesby warns that leaving it too late to make a decision may cause additional risk. It means having a strong eye for assessing when the tables are going to turn. If this is misjudged, the bank may find it has to react furiously. Moving now would eliminate that risk and allow the Bank of England to move one small step at a time.
“A large factor is that many people have been recently unemployed across the country. These people are less productive than they were. If it becomes the case that the economy continues to grow, then unemployment will dip faster than expected by the MPC. It calls for tight regulation.
The news comes following the flotation of TSB on the Stock Exchange. The flotation, says the 328 Group CFO, has made TSB popular on the stock market. “It shows that there is a large consumer interest that exists. It is also an interesting time for a possible interest rate increase. Inflation has fallen to 1.5% – its lowest level in five years – giving the MPC even greater flexibility. All the signs are good.”
The bank must also heed to the warning that growth will not slow in the latter half of 2014, with additional bank capacity estimated to be absorbed quicker than predicted, says Tony Shakesby.
From a business and finance perspective, a significant sudden rise could run the risk of hurting small companies and start-ups. “Small businesses, of which there are around 200,000 in the UK, could be thrown into more serious financial trouble. It is also worth noting that the number of medium-sized businesses in distress rose from 60,000 to over 230,000 in the quarter. Big businesses on the other hand, actually fell 9% – mostly because they have more access to credit. This could spell a case of a two-tier economic recovery.”
Interest rises have hit the headlines recently for other reasons, too. Lloyds Banking Group last week suspended seven members of staff after being forced to pay £226 million by finance regulators for manipulating interest rates both in the UK and in America. Lloyds, which is owned partly by the tax player, is the 7th manipulation to rates – but is the first to be publically named for deliberately lowering fees it paid to the Bank of England for emergency funding during the recession of 2008.
“This regulation dates back to the financial crisis,” says Tony Shakesby. “It dates back to when the institution saved HBOS from falling just days after Lehman Brothers went under. Attempts by traders at HBOS, Bank of Scotland and others in the group to cut their submissions to the Libor panel were deliberate, thus avoiding the image of the bank being
in financial difficulty. It is what we call in the industry as ‘lowballing’ and it another sign of how banks and financial institutions need to work together to build trust and tougher regulations.” financial institution to be fined for such