Rising interest rates: choppy waters for financial services

The 0.5% rise in interest rates last week means banks and building societies face tough decisions, says Odgers Acting Senior Consultant in Financial Services, Richard Plaistowe.

When the UK inflation rate hit a 40-year high of 9.4% in July, it was clear that the Bank of England would have to react in an attempt to rein in soaring prices. Especially as BofE’s Monetary Policy Committee predicts inflation will peak at over 13% in October as the cost of living crisis deepens.

But while it didn’t come out of nowhere, last week’s decision to raise interest rates by 0.5% to 1.75% – the biggest rate hike since 1995 – was nonetheless a hammer blow for many. At a time when a growing number of consumers are really struggling to make ends meet, this move provided even more unwelcome financial news.

An immediate result of the rate hike, reported the FTis mortgage misery for millions. There are around 2 million borrowers in the UK who have taken out standard and tracker variable rate mortgages. Additionally, an estimated 40% of fixed-rate mortgages expire this year or next, likely exposing many of these borrowers to significantly higher rates.

This comes amid a surge in credit card spending as many consumers struggle to keep up with rising grocery and utility bills. Consumers borrowed a supplement £1.8 billion in June, of which £1bn was loaded onto credit cards. As if that weren’t enough, a long recession is due to arrive in the UK this winter.

All of the above, combined, leaves banks and building societies pondering some tough decisions. To begin with, what support can be provided to borrowers in real difficulty?

It is important to clarify that in terms of liquidity, banks are in a much stronger position than before the global financial crisis of the late 2000s. As noted by BofE in its Financial Stability Report released last month, the UK banking sector has levels of capital and liquidity that can support households and businesses even as the economic outlook deteriorates.

The extent to which they do this remains to be seen. But after the difficult years of the pandemic and at a time when ESG and brand purpose are high on the agenda, there are clear reputational risks in pursuing an approach that could be construed as unsympathetic.

Financial services companies must also consider the dimension of employees. First, people want their employers to behave as responsible corporate citizens. But secondly, also to assuage their own personal concerns. If the recession does indeed hit as expected, will that mean layoffs? And if so, will the process be conducted fairly and with the appropriate sensitivity?

That said, banks are able to make more profits when interest rates rise, potentially offsetting some of the losses that might arise as customers dip into their savings. Against this is the fact that homebuyers can borrow higher multiples of their salary than a decade ago – therefore those who have overworked themselves are much more vulnerable to the risk of default. and, ultimately, the repossession of their property. Although it should be stressed that interest rates remain historically relatively low compared to the years preceding the global financial crisis.

Nonetheless, rising interest rates are a harbinger of rougher waters that may present an opportunity to hire temps who can add real value to the business. Experienced temps tend to excel in times of crisis and transformation, when chips are down and new thinking is needed. Only time will tell what lies ahead, but many financial services companies are very vigilant at this time.