KPMG experts comment on the decision by the Bank of England to raise interest rates.
Yael Selfin, Chief Economist at KPMG UK, comments on today’s decision by the Bank of England to raise interest rates:
“Long suffering savers will rejoice in today’s news of a first rise in UK interest rates in over a decade, but banks and insurers should also beware of the potential impact on their liabilities as their customers feel the strain. Consumers are already under pressure from falling real wages and the rise in consumer debt. So even a mild and gradual course of rate rises is likely to make a bigger impact this time.
“A decade of no rate rises has made many households complacent about the prospects of higher interest rates when considering their finances. There’s a whole new generation of borrowers who have never experienced a rate increase, with this group potentially representing over 20 percent of all mortgage holders in the UK currently. This means that even a small change in rates like today’s can have a significant impact on borrowers. The MPC gave a clear signal today that both consumers and businesses need to incorporate the prospects of a gradual rise in rates into their financial planning to help them deal with expected further rises in coming years.
“As inflation is expected to moderate next year, we see a very modest rise in rates over the next two to three years. We should all take heart from the fact that, despite current uncertainties and the more challenging economic environment, the UK economy is judged by the Bank of England as sufficiently strong to leave the monetary policy intensive care unit and is ready to embark on the long road to monetary normalisation.”
On Retail: Paul Martin, UK head of retail at KPMG, adds:
“The Bank of England’s decision to raise interest rate to 0.5%, may appear subtle at first glance, but it will undoubtedly send a very real signal to UK shoppers and retailers. This rise marks the first hike in 10 years, and there is therefore a sizeable portion of shoppers who have become all too accustomed to cheap credit.
“For some time now, UK shoppers have been coined as resilient against current economic conditions, but it’s critical to remember that much of this resilience can be attributed to the soaring consumer credit that has fuelled consumer spend. This interest rate rise holds the potential to turn the tide on this sort of consumer behaviour.
“Shoppers have been reprioritising their spend for some time now. On one hand the sector has had to compete for their share of disposable income against the likes of leisure and experiential spend. On the other, low wage growth and inflation at current levels has made the playground even smaller. We are already seeing shoppers notably claw back their discretionary spend, whilst increasingly focussing their attention on the essentials.
“As the purse strings tighten further, we will note more polarisation of spend, with value retailers likely to be amongst the winners. It is the mid-market retailers who will likely come under further pressure now.”
On Banking: Tim Howarth, Head of Financial Services Consulting, KPMG, comments:
“The rise in interest rates will be welcomed by the banking sector. The sustained low interest rate over the last decade has killed margins for UK banks but rising rates will start to turn that around. Typically asset margins rise faster than deposits, meaning rate rises on things like mortgages will happen sooner than on deposit accounts. If rates continue to rise gradually then in time we will also see increased hedging activity as once again banks look to protect themselves against interest rate risk.
“Banks will also be very mindful of the need to support vulnerable customers and those with loans they can just about afford. We will see an increased number of defaults but having slow and small increases like this is the best way to help manage that. The PRA is fully aware of this issue and has already taken steps to ensure banks are acting responsibly.
“A keen eye will be kept on the alternative lending space which has been built in an extended low interest rate environment so their models are largely untested in a rising rate environment. Today’s announcement takes us back to the 0.5 percent base rate where these platforms started but any further increases take them into unchartered territory. There is no FSCS security for those invested in alternative platforms to fall back. However, these are innovative firms and new challenges like a rising base rate should force further product innovation and competition.”
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Notes to Editors:
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