The BoE’s interest rate decision just got more difficult

Recent events in the US are causing headaches inside central banks across the globe, including inside the Bank of England and for the bank’s Governor, Andrew Bailey. The somewhat easy decision to increase the base rate of interest to combat inflation is now in question due to financial instability in the US, which is likely to reflect in the global financial market.

The Bank of England is deciding whether to raise the base rate again or keep it at a long-term high of 4%. But this decision isn’t going to be as straightforward as recent interest rate hikes.

What’s happened in the US? 

The biggest news from the financial sector in the US is the sudden collapse of Silicon Valley Bank (SVB). The bank’s collapse was identified as a result of a downturn in technology companies’ stock over the last year, in conjunction with aggressive interest rate increases by the Federal Reserve.

Since then, another US bank has gone under; this time New York’s Signature Bank, which reportedly collapsed for the same reasons. There were reports that the collapse was due to a decline in crypto value, but this has been refuted by many experts.

Why does this affect the Bank of England?

What happens in the US typically influences the global financial markets, including the UK. SVB had a UK subsidiary holding an estimated £6.7 billion in deposits. However, Andrew Bailey helped broker a deal for HSBC to step in and buy the subsidiary to prevent significant domestic damage.

There is already evidence that the collapse of SVB has had an effect in Switzerland. Swiss bank Credit Suisse was rescued by the country’s central bank with a £45 billion lifeline, and is now likely to be bought out by Switzerland’s biggest bank and Credit Suisse rival, UBS. These recent events have created real anxiety that we could be on the precipice of another global financial crash.

Will the BoE continue to raise interest rates?

The Bank of England has been increasing interest rates to help stop the rate of inflation and therefore reduce higher costs of living. By discouraging spending among the general public and encouraging more saving, the inflation rate should in theory be reduced. There are already signs that the rate of inflation has slowed down as a result of recent rate increases.

But now there is another variable to consider. If increasing interest rates are contributing to the failure of financial institutions, there is more cause for concern. Whatever the bank decides, it will be walking a tightrope between trying to get inflation under control and not impeding growth to the detriment of the financial sector, which could cause banks to crash.

What does all this mean for your mortgage? Speak with a Euxton Mortgage adviser for personalised help and advice regarding the current situation and your mortgage options. 

April 2023