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Now is the Time to Apply for Credit Financing

by Sam Allcock
01/08/2017

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The current economic climate in the United Kingdom requires stakeholders to act before rates rise. Recently, the Bank of England (BOE) indicated that there has been an increase in credit utilisation in the UK. According to the Bank of England’s Alex Brazier, there has been a 10% uptick in personal loans, car loans, and credit card balance transfers in the United Kingdom. Household incomes in the UK have risen by 1.5%. The BOE recently instructed UK banks to increase their ‘capital cushion’ in the event of an economic downturn.

Banks are now required to beef up their capital reserves by as much as £11.4 billion over the next 1.5 years. This is a safeguard against defaults and an economic uncertainty. BOE governor, Mark Carney stressed that despite Brexit concerns, the UK economy is far better poised to deal with economic crises than it was with the global recession following the 2008/2009 financial crisis.

How is the United Kingdom performing post financial-crisis?

The aftermath of the 2008/2009 financial crisis was crippling for many countries, including the United Kingdom. However, it didn’t take long before the UK economy began to mend. The challenge came with the June 23, 2016 Brexit referendum. Britons voted by a margin of 52% – 48% to break from the EU, and this had dire repercussions for the UK economy. Since then, the macroeconomic picture has been plagued by volatility and uncertainty. On the one hand, rising inflation levels have resulted in increased caution with lenders, and sub-optimal productivity remains the order of the day.

Economists, strategists and analysts were recently polled by Business Insider about their concerns vis-à-vis the UK economy. Many analysts are worried that inflationary pressures are the single biggest bugbear for the UK economy. Currently, inflation is at a multi-year high, despite plunging from 2.9% in May to 2.6% in June. The price of goods and services remains at high levels, well above the BOE’s target rate of 2%. On a parallel path is the performance of the GBP. A declining GBP is associated with higher import costs and increased exports. Consumer demand is down, and pending the outcome of the Brexit negotiations, could move lower.

Interest rates and their impact on personal and business loans

On Main Street, they are many concerns plaguing everyday Britons. These relate primarily to rising prices and falling real-money wages. Personal disposable income levels are lower, as wage growth remains weak. As such, a sharp uptick in personal and credit card loans has occurred. The BOE is determined to maintain financial stability in the UK, by watching credit expansion. The interest rate dilemma faced by the BOE is an interesting one. On the one hand, the central bank must combat rising inflation by way of interest rate hikes. On the other hand, the BOE cannot afford to squeeze consumers with higher interest rates. Since savings rates in the UK are low, and credit usage is high, the net effect on the UK is bearish.

The UK’s interest rate hasn’t risen in 10 years, meaning that some 8 million UK citizens have never experienced an interest rate hike. UK businesses aren’t wasting an opportunity to capitalize on historically low interest rates. The looming threat of an increase to the bank rate has resulted in substantially more applications for loans. Businesses realize that there are inherent benefits in applying for loans early, when interest rates are still low. The current British interest rate according to the Bank of England is 0.250% and it has remained this way since March 2009. By comparison, the Fed rate is 1.250%, the RBA rate is 1.500%, the BOC interest rate is 0.750 percent and the ECB interest rate is 0.000%. UK employment figures have been responsible for increases in GDP, not productivity.

Business loan applications increase as rate hike looms

Reuters analysts expect that sterling weakness will factor into the inflation forecasts and drive prices higher over time. A BOE policymaker, Kristin Forbes remains hawkish on the monetary policy committee, but hers is a minority voice. Currently, the MPC is split on when to raise rates, and by how much to raise them. Now that the UK is preparing to break from the European Union, it becomes more important to plot a blueprint for monetary policy. UK businesses will carefully be eyeing policymakers like Forbes and other hawks for any indications that the BOE will raise rates.

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