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Last month saw one of the biggest political U-turns we have ever seen and the shortest ever reign of a UK Chancellor and Prime Minister.  At the heart of this political demise was one issue – mortgage rates.   Today we have seen the Bank of England raising interest rates 0.75% to 3% – and talk is again of rising mortgage rates.

Mortgage rates more than doubled in the space of a couple of weeks after the mini budget.  To put that in perspective, even in the worst crises of the 70’s 80’s and 90s, the mortgage market did not see such a huge relative rise in rates in such a short time.  The risk to the UK property market, and the impact on individuals, and therefore the risk to the economy, was plain for all to see.

I don’t think it is any coincidence that on the weekend of the 15th October, the Bank of England Governor warned that unless we saw fiscal tightening, interest rates in the UK would have to rise further and faster to curb inflation and calm markets, and that in the following week we saw a u-turn on virtually all of the governments proposed tax cuts.  It is likely that in behind the scenes meetings between the Bank of England and Treasury this message was made very clear – reign in the budget deficit or interest rates and therefore mortgage rates will rise further.

This is the reality of the economic situation we are in, inflation is the number one issue.   Without a credible plan to tackle inflation the markets will continue to hammer the pound and UK gilts.  The only credible way for the Government and Bank of England to tackle inflation is through monetary or fiscal tightening.  The mini budget sent the government and bank of England on opposing paths.

Tightening means acting to reduce inflationary pressures by reducing overall demand in the economy.  This means reducing the amount of money in the economy.  The government and BoE have 4 levers they can pull to achieve this:

  • Reduce government spending – politically difficult for a government elected on a spending platform and with public services generally accepted to be at the bone
  • Increase taxes – political anathema to the Conservative Government
  • Increase interest rates – economically difficult given the UKs exposure to mortgage rates and the housing market
  • Quantitative tightening – the Bank of England reducing its balance sheet, which is impossible without the support of the markets, which are dependent on a credible plan for the above three.

We can therefore see the root cause of the existential crisis at the heart of the Conservative party.  A combination of all of these is necessary, none of which play well with the Conservative base.

The government is now signposting a combination of reduced spending and increased taxes in the hope that the Bank of England can then start reducing its balance sheet without the need for interest rates to rise more than is necessary.  The Government appears to have realised that the worst path is raising interest rates and mortgage costs.

It is difficult to see a path through all of this where there is not an economic contraction or a recession of some sort.

It is important that individuals, businesses and organisations understand their exposure to these events.  In particular your exposure to interest rates and changes to demand for your products or services.   It is also important you are getting good tax advice as we likely enter a period of increased taxation, the burden of which is likely to fall on business and the better off.

The one thing we are encouraging our clients to do this month is to think about your cashflow and funding needs over the next 18 months.  With rising interest rates and a tightening credit market, the better prepared you are and the sooner you act the better.  Many, particularly small businesses, leave it too late to raise cash in hard times.  Reviewing, understanding and improving your credit score could be an important thing to do.  Your credit score hugely impacts your ability to borrow and the rate you will be charged.  Many businesses do not look at this before its too late.  We are partnering with Capitalise to help our clients do this. Read this month’s article detailing our partnership with Capitalise by clicking here