On the 2nd November, the Bank of England’s Monetary Policy Committee (MPC) raised interest rates from 0.25% to 0.5%. By increasing the cost of borrowing and reducing disposable income, the move will limit the growth in consumer spending; which in turn, reduces the rate of economic growth and inflation pressures. With the influence impacting the interest rates charged by banks and building societies, our Director at Opus shares some thoughts on the financial implications of this move to best control inflation and enable the economy to grow at a manageable rate.

I been laid off from work, my rent is due, my kids all need brand new shoes.
So I went to the bank to see what they could do.
They said “Son, looks like bad luck got-a hold on you”.
Money’s too tight to mention…………

Some of us attended Thatcher’s tea party in the 80’s when there was the great dichotomy between striking miners and an impoverished North and the “loadsamoney” culture in the affluent South. (This statement is neither strictly statistically accurate nor historically correct but just let it go for the moment….). Whilst Mick Hucknall’s dulcet tones told of economic woes, the Human League sang about aspirational cocktail waitresses. For a large part of the country Simply Red’s song resonated more than louche wine bar sentiment.

Thirty years later, and after the first Bank of England interest rise in a decade, I wonder soon if be time for a re-issue or another cover version (Simply Red’s song was itself a cover of a song by the Valentine Brothers).

But maybe not this year though . . . Whilst the financial press seems to expect that there will be two further rate rises in the next 12 months (albeit at modest levels) the immediate impact is of course on savers and borrowers. But the rise from 0.25% to 0.50% only returns us to the pre-Brexit rate and no one is going to have a dramatically improved savings income from a 0.25% rise. If you had £1m saved you’d only get an additional £25K pa which I presume is not a big deal to anyone with £1m tucked away anyway.

UK mortgage rates

Of course rate rises always gets the media focused on how borrowers are going to feel the pinch. And for most people the biggest loan will be their mortgage. But we live in an online world these days and consumers are arguably savvier hence the statistics that tell us that 57% of homeowners are on fixed rate mortgages so they won’t feel the change. But typically, these are only 2 year starter deals and many people might not feel the pain today but come re-mortgaging time . . .

Consumer spending on credit cards

And as for credit cards? Consumer spending has slowed. If wages remain static in the foreseeable future any form of inflation, even at modest levels, will mean households will have less cash availability for discretionary spends on holidays, eating out, consumer electronics etc. People may rush to credit cards as a way to maintain a certain lifestyle but it will all slowly but surely have a higher cost. We may have been living in a moribund economy but it may be slowly becoming morbid.

Businesses in distress

For all those so-called “Zombie” companies, saddled with debt, unable to repay the loan principal but just about meeting the interest payments; the increase could be the final straw. Cash flows are just going to get tighter. Think of it as akin to a boxer lasting through to round 10, taking punches al the time, but still just about on his feet. It just takes one solid hit and he’s down and out.

If you’re a director involved in running a business, and it has been taking so many punches that the canvas is looming – I’d recommend you speak to an insolvency and restructuring specialist as soon as possible. By doing so you will ensure that you protect your personal position, are able to navigate safely through the Insolvency legislation and to the extent possible preserve your business, your livelihood and jobs for your workforce.

Now what are we all to do when the money’s got a hold on you?
Money’s too tight to mention . . . 

The Eternal Optimist