A land of expensive bread and honey

At the time of writing, inflation has again hit the headlines, with the overall rate only slowing to 10.1pc from 10.4pc at the start of the year. Worryingly, food prices are going up faster than at any point in the last 45 years, and in this week's blog, we are focusing on what that may mean for rates as the Bank of England steps in to try and fight the fire.

Since 1997 the Bank has maintained operational independence; the MPC sits to make long and mid-term decisions on monetary policy and outside of nerdy financial circles, from 2008 until 2020, enjoyed relative anonymity, rates were deliberately low, mirroring the US FOMC approach of cutting rates to almost nothing. Flooding the global economy with cheap money was a way to grow an economy out of a deep recession, unwittingly laying the foundations of what would become problematic a decade or so later. However, 2020 and the challenges we all faced would shatter the anonymity of the MPC and suddenly thrust them into the spotlight like contestants on Britain's Got Talent; suddenly, everyone is talking about rates, and their decisions will make a significant impact on our economy built on cheap money. To achieve the coveted golden buzzer of approval from a government demanding decisive action, they need to undertake a tricky balancing act to protect the pound's purchasing power and, on the other hand, not unravel a decade of business and capital market growth.

The ring-fencing of the Bank does not make it immune from political pressure, and that's where we may see a change in its base rate strategy throughout Q3 & Q4. Drilling down on the actual numbers, the consumer prices index measure of inflation fell slightly to 10.1pc in March from 10.4pc in February, with the upset being analysts had expected a drop to 9.8pc, the yield on two-year Government gilts, rose ten basis points to 3.76pc upon the news breaking, and we saw retracements and sell-offs in capital and speculative markets from the open. The issue here may be the fact that it’s food hitting the headlines. Bread, cereal, and chocolate are going up when the ONS are telling us that globally food prices are going down, and this is in direct contrast to the statement by Jeremy Hunt, "We have a plan, and if we're going to reduce that pressure on families, it's essential that we stick to that plan, and we see it through so that we halve inflation this year as the Prime Minister has promised." So somewhere in the UK supply chain or economy, something is going wrong; we can't rectify the logistical Brexit issues very quickly, so the political will may lean towards further rate adjustments as some decisive action plan; time will tell.

So where does a higher terminal rate leave the lending markets? Well, there is often a misconception that all borrowing becomes more expensive as the base rate increases; the popular doomsday narrative last year was that the retail mortgage market would collapse if we ran over a 3% base rate; however, the reality is almost all lending pricing is formulated off a mixture of the base rate, the 5-year sterling overnight index average, or SONIA (named after an English popstar from Liverpool) and straightforward competitor and market competition. The sentiment behind the SONIA is based on a projection of where rates will go and the confidence the market has in the Bank resolving the crisis, so if that's leaning towards parity, there is a problem; if that's below base rate, or ideally tracking down, it means there is a confidence in the market that rates will come down based on the action the Bank is taking today. Furthermore, the SONIA is overnight, so unlike LIBOR, which tracks over a set period, it gives you a snapshot of what's happening today. So, we are optimistic that any decisive action taken by the Bank will reflect well in these rates; it's the reason why, in the retail mortgage markets, the cost of borrowing dipped as the base rate was increasing because pricing comes from the confidence in the action, not from a reaction to fundamentals and news.

Providing affordable capital driven by all these factors is paramount in our sector. Therefore, Invest & Fund will continue to work closely with our partners to maintain a robust and confident funding approach.

Our Development Finance clients can benefit from facilities up to 70% LTGDV (Up to 85% LTC) from 5.30% plus the cost of borrowing.

For a full criteria breakdown, please email us at borrowing@investandfund.com or call us on 01424 717564.