The Bank of England’s MPC voted two days after Halloween by seven-two to raise interest rates from 0.25% to 0.50%; for the first time in over a decade to combat Brexit-fueled inflation. Mark Carney, Bank of England Governor, has also strongly signalled that at least two more rate rises will occur by 2020, increasing uncertainty for millions of Britons on variable rate mortgages and loans. Just yesterday, Mark Carney warned of a Brexit “shock” to Britain’s financial markets. Mr Carney said the decision to leave the EU has already turned Britain into the “slowest growing economy” in the G7.Sir Jon Cunliffe (my former boss in fact whilst I was at HM Treasury), the BoE’s Deputy Governor for financial stability and a member of the MPC, voted against a rate rise, pointing out that wage growth has not picked up since 2011 even though the unemployment rate has almost halved to 4.3%, the lowest since 1975. In fact, real wages have continued to shrink as pay growth excluding bonuses remains at a below-inflation 2.2% level.Many economists share Cunliffe’s view that interest rates should not have increased earlier this month, especially given the uncertain economic outlook caused by Brexit. So, what does this mean for borrowers looking to hedge? As I write, the cost of securing a fixed rate £10m loan over a ten-year period has actually dropped by £19k since the announcement! It is important to remember that swap rates fluctuate continuously and are likely to react to market news before the MPC is able to. It is arguably a sign of the markets concern for the British economy (exacerbated by Brexit uncertainty) that the 10-year swap rate is, in fact, lower following this interest rate rise.What does the interest rate hike mean for importers/exporters? Importers have suffered over the past two weeks; since the announcement, the Pound has fallen against the Euro by 0.80% to 1.1218 and by 0.75% to 1.3204 against the Dollar. Putting that into context, you would need to spend £142k more to import €10m worth of EU goods today than if you had made the purchase just before the announcement. In the current economic climate, the potential for future rising interest rates could have a significant impact on your business. You can keep track of key market rates by subscribing to our FREE market rate sheet. Updated daily, this concise summary covers swap rates (i.e. fixed rates for loans), FX rates and more. Visit our website for more details.
