The Bank of England announced that UK economic growth is expected to flatline throughout 2024, expecting minimal or no growth throughout next year. Rates are set to be held at 5.25% for the foreseeable future, combatting persistent inflation and attempting to avoid recession. This comes after a decision in September where the Bank of England held the interest rate at 5.25% rather than increase it. Although it is good news the interest rates are no longer increasing, this keeps interest rates at a 15-year high with no sign of a reduction anytime soon.
Jason Hollands, managing director of Evelyn Partners, commented on how attention is being refocused both on speculating how long interest rates will remain the same and on the affect on client behaviour in wealth management, explaining:
Unless there is a surprise resurgence in inflation, interest rates have likely now peaked but following the latest meeting of the Bank of England’s Monetary Policy Committee, which voted to keep rates on hold, the Bank also doubled down on the message that rates would likely remain elevated for some time before any implementing any cuts. The markets have therefore refocused their attention from when rates will peak to a new guessing game of how long they will remain at current levels.
With GDP growth forecast to be flat in 2024, the economic outlook is finely balanced between a softish landing of sorts and potentially slipping into a mild recession. If the latter happens, rate cuts could be necessary much earlier than the Bank of England anticipates.
For now, this remains a relatively tough environment for wealth managers as clients focus on deleveraging and high cash savings rates deter some clients from investing. However, attractive nominal bond yields put this asset class firmly back on the radar and there is likely a relatively limited window of opportunity to act to lock-in current yields.
Nicholas Hyett, investment manager at Wealth Club, discussed how Private Banks need to specialise in offering attractive investment terms, adding:
The Bank made it clear last week that, while interest rates may not rise much further, if at all, they’re likely to remain elevated for some time. As a result, attention is turning from the short-term effects of rising interest rates to the long-term consequences of businesses and individuals refinancing existing loans at higher rates.
Loans that made sense and were affordable when rates were effectively zero may be less logical when they come up for renewal in the next couple of years. That creates both challenges and opportunities for the lending arms of private banks. On the one hand, we may see loan impairments rise as companies or individuals struggle to refinance in a tougher rate environment. However, it’s also an opportunity for the private bank’s specialist lending businesses to prove their value. The ability for high-net-worth clients to pledge unusual collateral and adopt tailored structures means private banks could potentially offer attractive terms than conventional lenders, while still earning attractive rates of return.
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Rufaro Chiriseri, Head of Fixed Income for the British Isles at RBC Wealth Management discussed the effect on the UK’s economic situation on mortgages and consumer demand, adding:
While the October PMI data showed a moderate improvement from September, the risk of a shallow downturn remains, in our view. The latest PMI data is consistent with GDP growth of around -0.1% q/q and -0.2% q/q for Q3 and Q4, respectively. This is notably weaker than the November MPR’s forecast of a milder recession. In addition, the MPR highlighted that “higher interest rates are expected to reduce demand to an increasing extent” and BoE staff estimate that less than half of the effect on GDP has been realised. Notably, households’ proportion of expenditure on mortgages is expected to rise as more households refinance their mortgages – outweighing the boost to incomes from higher savings rates. This presents a challenging backdrop for consumer demand and ultimately growth in the near term.