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Monday Morning Update 

Starmer makes bold announcements, Bank of England interest rate decisions, and rising borrowing rates.

Starmer Turns Focus Towards North Sea

Keir Starmer is set to make a couple of bold announcements in a speech in Scotland later today: In another gauntlet throwdown, he has pledged to end North Sea oil and gas exploration but in return he will scrap the planning rules that ban new onshore wind farms.
To be fair to him, announcing this in Scotland takes some guts as the oil and gas industry supports 90,000 jobs north of the border and 200,000 as a whole in the UK. In a bid to reassure the industry he has said that any licenses in existence as of January 2025 will be honoured, which will mean that it will be more of a taper than a cliff-edge for the industry.

 

 

Sir Keir will be eager to shore up support from environmentalists after Labour announced that the £28bn a year fund for clean energy would have to be phased in more slowly than they’d like because of the state of the UK finances. There’s an interesting article in the FT that compares Labour’s plan to that of Joe Biden’s Inflation Reduction Act; on a relative scale basis, Labour’s plan dwarfs that of Biden’s coming in at 1.1% of GDP compared to 0.15% of US GDP. The article argues that such fiscal shock and awe is normally only possible in moments of deep crisis and questions whether where we are now would qualify as such a crisis? www.ft.com/content/bac1b1ed-0aa8-4c0a-baab-efaadc2133c3

All Eyes on BoE this Thursday

This Thursday will see Threadneedle Street make their latest interest rate decision where the general market consensus is expecting to see another 25bps rate hike. This would mark the 13th consecutive rate hike as the Bank of England try to bring inflation back in line with its 2% target.  As we looked at last week, markets upwardly revised their rate hike expectations following a flurry of hotter-than-expected data around the UK labour market which showed unemployment falling, wages rising and more people in work than ever before. With markets assessing the inflationary impact of the data, according to money markets the implied interest rate expectations for the Bank of England is for a terminal rate of around 5.7% by H1 2024. With the base rate currently at 4.5%, this suggests that there could be another 120bps of hikes from the BoE – which if realised would bring borrow rates to their highest level since July 2007.

As such, all eyes are on UK CPI this Wednesday, where markets are expecting to see the headline figure fall 20bps from 8.7%. Meanwhile, annualised core is expected to remain unchanged at 6.8% as the UK economy grapples with sticky inflation making its mark on the services sector of the economy. Figures will be released at 0700 on Wednesday ahead of the BoE’s decision at 12noon on Thursday.

 

Banks’ Net Interest Income Continues to Rise

High street banks are continuing to face criticism over failing to pass on savings rates to consumers. With all eyes on the Bank of England’s rate decision on Thursday, commentators are assessing the extent to which banks are profiting from rising interest rates, as the country sees borrowing rates rise to their greatest level since 2008 following 12 consecutive rate hikes.

Recent figures reveal that banks’ net interest income (the difference between what banks charge consumers to borrow vs what the pay on consumers’ savings) has soared given a rise in their net interest margin. For example, Lloyds’ have seen their net interest margin from £11.2bn to £13.1bn over while NatWest saw their net interest income rise £7.5bn to £9.8bn as their net interest margin rose 0.55 percentage points from 2.3%. Meanwhile, HSBC and Barclays’ net interest income has risen to £6.2bn and £5.9bn, respectively.

Given the rise in banks’ net income margins, banking executives have faced criticism that they have not adequately passed on higher savings rates to consumers as the cost of living and rising mortgage payments continues to squeeze households. For example, earlier this year Danny Kruger MP, a member of the Treasury Select Committee said that “the FCA should investigate the conduct of the banks as a matter of urgency” adding that “something is going wrong when banks are profiting from rising interest rates while savers aren’t seeing the benefits.”

Banks both sides of the Atlantic are also seeing net interest income continue to rise, with Wells Fargo & Co last week issuing guidance for a 10% higher net interest income over 2023. Moreover, earlier this year, JPMorgan Chase & Co released guidance that they are now expecting its net interest income to hit around $84bn, an upward revision of $3bn forecast in April.

Hunt Rules Out Direct Fiscal Support for Soaring Mortgages

As interest rates in the UK look set to continue to rise, the knock-on effect in the mortgage market is being felt by millions of households. The FT is citing treasury sources in its article that says Jeremy Hunt has ruled out direct fiscal support for households that are struggling with payments and will instead work with banks to ensure they take responsibility and do what they can to help. The chancellor is concerned that direct support would continue to

 

drive inflation which would in turn force the Bank of England’s hand to keep raising rates, therefore creating a vicious cycle. Meanwhile Michael Gove, the cabinet minister for housing has said that the government would be keeping the situation under review, but that money could not be “magicked from thin air”.

www.ft.com/content/b2c468ce-c544-4104-8d92-df27f017ef43

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