Credit, collections & insolvency news
The Bank of England (BOE) has raised interest rates by 0.5 percentage points to 1.75%, the biggest rate rise in 14 years.
The increase is the biggest increase in 27 years, with a prediction that inflation would hit 13% by the end of the year. It was the sixth consecutive raise and the biggest single increase since 1995 .
The Bank said it expects the UK to enter a recession in Quarter 4 of this year with inflation expected to hit 13% later this year and remain elevated throughout 2023.
Commenting on the increase in the bank Rate from 1.25% to 1.75%, Robin Fieth, Chief Executive at the BSA said “Another Bank Rate rise, the sixth since December, will be unwelcome news for many homeowners. But with around eight in ten mortgage holders on fixed rates it will take time for these rises to be felt by many borrowers, as they will continue to pay the same each month until their current deal ends.”
“When those fixed rates end, most will choose either to re-fix with their current provider or search the market. Whilst rates remain comparatively low, we have seen fixed rates rise sharply since December 2021 and borrowers will need to consider the impact of increasing rates alongside all the other increasing demands on their monthly earnings.”
“It’s likely to cost those at the end of a 2 year fixed rate who re-mortgage to a new similar deal around £100 more a month. For those on 5 year fixed rates, their re-mortgage is likely to increase their payments by around £60 a month.”
“Lenders are sensitive to the rising number of people facing a squeezed household budget. Anyone who is worried about their ability to pay their mortgage should get in touch with their lender early and they will do everything possible to help.”
Richard Lane, StepChange Director of External Affairs, said “While higher interest rates may be needed to dampen down inflation, right now struggling households are having to cope with both. For many people, the overall cost burden simply isn’t sustainable, and with energy bills set to rise even further than previously expected, the pressure won’t be easing off any time soon.”
“Affordability and debt are going to need to be top of the list for the next Prime Minister. In the meantime, anyone struggling should visit StepChange’s dedicated cost of living hub, which is full of useful pointers on how to start dealing with current financial pressures. Home-owners worried about mortgage arrears can talk to our in-house mortgage arrears advice team, and we also have a dedicated mortgage advice service which is free to access for anyone, whether or not they are experiencing debt problems.”
Jane Tully, Director of External Affairs and Partnerships at the Money Advice Trust said: “Today’s interest rate rise, the largest in 27 years, will add to the worries of homeowners already struggling with soaring prices. October’s energy price rise is just around the corner and with inflation predicted to continue to increase into next year, there is little respite in sight for millions of people.”
“With household budgets stretched from all directions, it is crucial that creditors treat people struggling to pay or already in difficulty fairly, including offering payment deferrals where appropriate and pausing collection activity. And with the situation only set to get harder, it is more important than ever that people are able to easily access the help and advice they need.”
John Phillips, National Operations Director at Just Mortgages said “This latest rate rise heralds the most important period for mortgage advice in a decade.”
“I don’t think that anyone will have been caught off guard by the rate rise which the Bank Governor hinted at last month, but this is the sixth increase in a row and arguably the most significant in recent years as it brings us within touching distance of two percent. The last time we saw a base rate that high was December 2008 and in many ways there is more uncertainty now that there was then, even in the midst of the credit crunch.”
“As mortgage rates rise, feedback from our network of brokers across the country reveals that they are working overtime to secure the lowest deal for clients before rates rise further and lending criteria tightens which will be exacerbated by this latest rise.”
“There is no doubt that borrowers are confident in the value of their homes but they are becoming increasingly nervous about the impact of fuel, food and energy price rises on lenders affordability criteria and their potential to secure the loans they need at the price they want. Now, more than any time in the past decade, the knowledge and experience of professional mortgage brokers is crucial.”
Neil Kadagathur, Co-Founder and CEO of Creditspring, said“Household budgets are already stretched to breaking point and many have no option but to borrow to survive with recent Bank of England figures showing that credit card spending is rising at the fastest rate in 17 years. However, with the cost of borrowing set to increase as financial institutions pass on the costs of the interest rate hike to customers, millions are likely to be wondering how they’re going to get through the next few months.”
“Borrowers across the UK are in need of urgent support, but too many find themselves at the mercy of unscrupulous lenders offering extortionate terms. The FCA’s Consumer Duty will provide some protections but the onus has to be on lenders to become more transparent around charges and repayment terms, and treat customers fairly in times of difficulty. Otherwise the UK is balanced on the verge of a credit crisis.”
Helen Morrissey, Senior Pensions and Retirement Analyst at Hargreaves Lansdown said “We need to brace for tough times ahead as the Bank of England predicts a recession on the horizon at a time when people are already under severe financial pressure from soaring bills. Interest rates have increased for the sixth successive time as the Bank of England battles to tame soaring inflation. This month’s increase is the largest in over a quarter of a century.”
“It’s a global phenomenon with the BoE following the Fed and ECB in going above and beyond 0.25bp increases as inflation proves incredibly stubborn. The Bank of England now expects inflation to peak at 13% in the second quarter of 2022 and that it will remain elevated through much of 2023. This is largely down to a near doubling of the wholesale gas price since May which feeds through to higher prices for consumers. Recession predictions pile on the pressure even further with the potential for job losses causing further concern for people already struggling to pay their bills.”
“The interest rate increase has big impacts for our finances. Mortgage holders who are yet to fix their rates as well as those trying to repay other debt who will see their repayments climb. However, savers and people coming up to retirement may be able to find some slightly more positive news among the gloom.”
Federation of Small Businesses (FSB) National Chair Martin McTague said “The need to get a grip on inflation is clear, with costs at a record high for 89% of small businesses according to FSB’s latest Small Business Index – driven by fuel, utilities, inputs, labour and tax hikes.”
“Moving interest rates is not without consequences: it’s removing steam from the economy at a time of meagre growth. Small businesses already face grave uncertainty as they try to recover from the impact of Covid, while contending with the cost of doing business crisis.”
“First, many commercial, personal and professional loans that small businesses and sole traders hold are not protected by fixed rates and will move in line with the increase today. In a situation where inflation is already putting many small firms in extremely difficult conditions, there is now further concern that these businesses will face higher costs in paying back their loans.”
“Second, attempts to get back to a functioning commercial lending market will be hampered as new products will become more expensive – and so small firms will find it harder to access affordable credit. The British Business Bank’s Recovery Loan Scheme is coming back later this month, and this could not happen soon enough. If the economy slows in autumn, it will be even more important for the scheme to be operational and in place, so it can be flexed up.”
“Hard-working individual business owners are also already fighting an uphill battle with supply chain disruption, increasing utility bills and surging fuel prices. Action must therefore be taken on other challenges that small businesses face.”
“Many members are reporting mushrooming energy bills multiplying by four or five times in recent months. Small business energy customers don’t benefit from consumer protections, nor do they have the negotiating power of their larger counterparts, making utility bill inflation especially tricky to handle. Struggling micro-businesses should be offered help on energy costs to match that being given to households.”
“The Government should also be looking at other measures to ease soaring costs of doing business, such as a reversal of the hike in National Insurance, cutting VAT and fuel duty, and introducing new reliefs on business rates.”
“The cost of living crisis can’t be solved without at the same time solving the cost of doing business crisis; we must bring down inflation, but the negative aspects of today’s hike make the case stronger for small business support as thousands upon thousands of small firms will have less financial room to manoeuvre.”
Kitty Ussher, Chief Economist of the Institute of Directors, said “We welcome this decisive action by the Bank of England. Concern about inflation is causing firms to hesitate before committing to essential long-term investment. With energy prices continuing to rise, strong intervention is needed to increase confidence that we will soon be through the worst, so that boardroom decision-makers can plan ahead with greater certainty.
“At the moment two-thirds of our members believe the inflation rate will continue to rise until at least the Spring of next year, with a large number thinking the peak will come even later. We will be watching carefully to see if today’s rate rise brings business expectations more into line with the Bank of England’s central forecast that inflation will peak before the end of this year.”
Ed Rimmer, Chief Executive Officer at Time Finance, said “The latest interest rate rise is simply another blow to business confidence and places even more financial strain on our economic recovery as we continue to grapple with rising costs.”
“There are arguable benefits to this move from the Bank of England as it has faced mounting pressure to keep up with the pace of global central banks, but it is short sighted. We know that an interest rate rise alone cannot curb inflation; the challenges around soaring costs need to end somewhere because for UK businesses this simply isn’t sustainable. The IMF recently adjusted its predictions for UK growth in 2023 to just 0.5% compared with the predicted 1.2% earlier this year. So, the big question here is what will happen to these figures if Government intervention doesn’t happen soon? Well, for many businesses it will slow down growth, making the impending recession a self-fulfilling prophecy. Instead, we need action that stimulates economic growth.”
“Few businesses have the luxury of using their own capital to finance investment, and for some, it isn’t enough to manage day-to-day expenses, like paying their own suppliers, HMRC or employees. That’s a worrying outlook.”
“Already we’re seeing demand for finance rise, as business concerns grow over the possibility of a recession. Many, who were trading around the time of the last recession know just how challenging this can be and will fear that traditional lending routes, like the highstreet Banks, will close their doors once again and withdraw their support.”
“The role of alternative finance has for a long time filled a void in supporting SMEs where some lenders have fallen short in challenging economic markets. Business appetite for growth doesn’t dwindle simply because some funders have tightened the purse strings. Businesses need and deserve funding partners who are available to listen and really understand their concerns, not turn their backs when the going gets tough. No one is in any doubt that borrowing must be done responsibly, wisely and at the right time but without it, the economic growth the UK desperately needs simply won’t be achievable.”
Tommaso Aquilante, Associate Director of Economic Research at Dun and Bradstreet said “The UK’s economic outlook has deteriorated rapidly in recent months, and the Bank of England (BoE) raising interest rates reflects the challenges faced by the UK. Today’s BoE press conference is an indication of how acute the activity-inflation trade-off is, and how opportunities for soft-landings might disappear very fast. Despite forecasting five consecutive quarters of recession, Governor Bailey strongly signalled that there will be further hikes as well as an acceleration on active quantitative tightening. With these and other announced decisions, the BoE wants everybody to understand how serious they are about price stability.”
“Amid rising global political and insecurity risks for 2022, and consumers grappling with higher prices of essential goods, the growth prospects of the economy have weakened. Recession risks are rising not just in the UK, but across the globe as well, and economies need to prepare for potential prolonged periods of anaemic growth and elevated inflation.”
“One consequence of tighter monetary policy is likely to be a stronger currency. Companies that conduct business on a global scale or rely on the services of foreign suppliers and customers will need to re-assess currency risk, especially relative to reserve currencies the dollar or the euro. This means that they need to constantly monitor the pulse of the economies where they directly or indirectly operate, as well as have a complete picture of their suppliers, customers, and potential customers to identify problems with cash flow early on and assist in their decision making. In times of economic uncertainty, strong cash flow management becomes mission critical.”
Dr Tony Syme, Macroeconomic expert from the University of Salford Business School, said “Another month, another repeated message about the dangers of inflation, and another use of an inept tool to tackle it.”
“Andrew Bailey today repeated his Mansion House speech when he said “there are no ifs or buts in our commitment to the 2% inflation target”. That means interest rates will exceed 2% this year and are very likely to exceed 4% next year, by which time inflation is expected to have reached 13%.”
“In his Mansion House speech, he outlined the three big supply disturbances of the last year or so that has caused the inflationary rise: supply chain pressures post-Covid, a declining UK labour force, and the Russian invasion of Ukraine.”
“None of these supply-side problems can be addressed by increases in interest rates. They are trying to carry water in a sieve. The intention may be reasonable, but the tools are wrong.”
“And with no end in sight for the war in Ukraine, the current inflation is only going to worsen. The EU is already starting to ration gas and prepare for a tough winter.”
“Through no fault of their own, people are already paying the cost of this inflation with the cost of living squeeze. This new rise in interest rates means that people will again suffer the consequences.”
“The answer lies in international diplomacy and an end to the war in Ukraine, not interest rate rises.”
But Zeeshan Syed, Economic expert from the University of Salford Business School, disagrees he said: “This was the right time that BoE raised the rate by 0.75% or even 1% because we needed a recession sooner rather than later. Although the rate rise is the biggest in decades; nevertheless, it’s nowhere near curtailing the supply-side price shocks. The inflation is bound to exacerbate further when we have a new prime minister with promises to spend more and tax less.”
“Unfortunately, our cash-rich middle class, which accumulated substantial cash savings during the pandemic, is refusing to back down. Their refusal means that suppliers, service providers, and manufacturers can expect higher prices for their future services. This fallacy ensures a red-hot job market, an unwavering tendency to consume more, and rampant price growth. Just take this example, despite a more than 10% devaluation of GBP against USD, we are witnessing record demand for foreign holidays. Simple economics does not explain this behaviour.”
“BoE’s job right now is not to shy away from the fact that any chance of prolonging this “consumption-led boom” will make future recessions more painful, hurtful, and politically and socially unsustainable.”
