RESULTS published in recent days by the UK’s major banks offered further evidence of the huge boost lenders have been receiving from the steady rise in interest rates over the last 16 months.
But while the banks have been cashing in on the increased cost of borrowing, higher interest rates have heaped intense pressure on businesses and households reeling from rampant inflation, albeit the housing market has belatedly shown signs of resilience.
And when the latest vote by the Bank of England’s Monetary Policy Committee is announced today, that pressure may increase further still. With the latest official figures confirming that annual UK consumer prices index inflation remained stubbornly high and above 10 per cent in March, the consensus from a poll of economists carried out by Reuters was that the MPC will announce a decision to increase interest rates from 4.25% to 4.5%.
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Beyond that, there seems to be an expectation that rates will be held at around that level for the following months, with inflation forecast to ease over the remainder of the year.
“Our expectation is that there is probably going to be at least one more interest rate rise,” said Harvir Dhillon, economist of the British Retail Consortium, in an exclusive interview with The Herald on Monday.
“We think that the Bank of England will [then] hold it at that level but there won’t be a swift cutting of rates, because a lot of these inflationary pressures will stick around and persist.
"We are currently expecting that those pressures will mean inflation is above target into next year. It raises the prospect the Bank of England will have to hold and stay, rather than cut quickly.”
While there is an expectation inflation will gradually fall in the coming months (albeit prices will still be rising but just at a slower rate), the prospect of interest rates remaining above 4% for the foreseeable future will be worrying for homeowners and people seeking to get on to the property ladder.
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As Paul Denton, chief executive of the Scottish Building Society, warned in an interview with The Herald earlier this year, the level of interest rate we are now seeing is a return to “normal” after the protracted period of rock-bottom rates that followed the financial crisis of 2008 and 2009. Mr Denton said that means mortgage holders can expect to pay £250 to £300 more per month going forward compared with the decade before rates began their upward trajectory in December 2022.
“This is us returning to a normal level of interest rates and consumer behaviour needs to adjust to a new normal, rather than hoping that this is a blip,” he said in January.
The added pressure this has brought to customers was reflected in the results from Lloyds Banking Group, owner of Bank of Scotland, and Virgin Money, owner of the former Clydesdale Bank, last week.
Lloyds reported first-quarter profits that exceeded market forecasts but increased its provisions for bad debts in the first quarter, to £243 million compared with £177m for the first quarter of 2022.
Market analysts appeared sanguine about the extra provision and the bank itself emphasised that asset quality continues to be “resilient with impairment levels low”. But the increased provision is nevertheless an acknowledgment of the choppy economic waters that households and businesses are having to navigate.
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That uncertainty was perhaps brought into even starker relief at Virgin Money, which the day after Lloyds announced its results reported an increased charge for bad debts in its first-half results and signalled its expectation that arrears will rise, prompting a sharp reversal in its share price on the day.
Virgin booked impairment losses on credit exposures of £144m for the six months to March 31, higher than forecast, and up from £21m for the same period of the prior year. The higher impairments, alongside a rise in investment costs, contributed to statutory profits falling by 25% to £236m from £315m for the first half.
The bank said: “Recent rate rises, and ongoing inflationary impacts have seen affordability tighten for many UK businesses and individuals, and the group remains ready to support our customers as required. Pleasingly for now, the number of customers in financial distress remains low, but we continue to expect arrears numbers to increase as the credit cycle normalises and have increased our provision coverage during H1.”
Although banks such as Lloyds and Virgin Money are continuing to benefit from higher interest rates, the flip side is the added pressure they are exerting on customers, with homeowners dealing with a significantly higher cost of borrowing.
And even more people are going to be feeling that pain in the coming months, as an estimated 1.4 million people are due to renew their mortgage deals this year and inevitably set to move on to higher rates.
Yet, despite higher interest rates, evidence has emerged in recent times which suggests the housing market is showing a degree of resilience amid the challenging conditions.
The latest Nationwide house price index, published on May 2, highlighted “tentative signs of a recovery”, with the annual rate of price decline easing in April compared with March.
Robert Gardner, chief economist of Nationwide, said: “While annual house price growth remained negative in April at -2.7%, there were tentative signs of a recovery with prices rising by 0.5% during the month (after taking account of seasonal effects). April’s monthly increase follows seven consecutive declines and leaves prices 4% below their August 2022 peak.
“Recent Bank of England data suggest that housing market activity remained subdued in the opening months of 2023, with the number of mortgages approved for house purchase in February nearly 40% below the level prevailing a year ago, and around a third lower than pre-pandemic levels. However, in recent months industry data on mortgage applications point to signs of a pick up.”
He added: “This also chimes with the recent shifts in consumer sentiment. While confidence remains subdued by historic standards, people’s views of their own financial position over the next 12 months, and general economic conditions in the year ahead, have both improved markedly in recent months.”
Housebuilder Persimmon did its best to appear positive about the outlook when it reported to the market at the end of April.
Persimmon declared that it was “encouraged by the early signs of improved customer confidence”, despite reporting a 42% fall in completions in the opening quarter of the year. The builder’s upbeat assessment appeared to help the builder reverse some of the significant share price decline it has seen since the start of the year.
With consumer confidence still at a low ebb thanks to the shocks the UK economy has suffered in recent months, it was perhaps no surprise that signs of recovery were seized upon by investors, even when the shoots of recovery could be described as nascent at best.
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