As expected, the Monetary Policy Committee (MPC) of the Bank of England (BoE) has cut Bank Rate by 0.25% to 4.00% at its August meeting – albeit by a close 5-4 vote in favour. This is consistent with the consensus view in the latest Reuters monthly poll of economists that anticipated the Bank of England (BoE) cutting interest rates both in August and again in November, despite inflation remaining above target in the coming months. That would put the Bank Rate at 3.75% at year-end, with two further reductions expected by economists in 2026. Median forecasts in the latest poll also predict that the UK economy will grow by 1.1% on average this year (the same as in 2024) and by 1.2% next year. The BoE had already cut Bank Rate four times since August 2024, bringing Bank Rate down a full point from a peak of 5.25%.
The Chancellor, Rachel Reeves, believes that the City of London needs more dynamism but many analysts are concerned that some of her latest reforms, including weaker rules for banks, may raise the risk of economic harm. Ms. Reeves has repeatedly said that regulation was a “boot on the neck” of growth and talked up a range of measures to cut red tape on the financial sector which accounts for 9% of UK economic activity. It is proposed that banks may be allowed to alert customers to the fact that money in their cash accounts could be earning higher returns in the stock market, a practice that was stamped out after the 2008 crisis. Reeves is also considering further changes to tax-free savings accounts, which could in theory include nudging more people into equities.
In order to reduce red tape, the BoE has lightened the capital requirements for medium-sized banks as part of a wider set of reforms aimed at boosting the UK’s financial sector. The BoE has increased the minimum asset threshold at which banks have to issue expensive debt – known as “Minimum Requirement for Own Funds and Eligible Liabilities (MREL)” – so that they can be bailed-in if they fail instead of needing taxpayer rescue as happened in the 2008 financial crisis. The BOE has set the threshold at between £25 billion-£40 billion of assets which was up from a previous £15 billion-£25 billion. The BoE said it will decide on which resolution method is appropriate for banks within that band on a case-by-case basis.
The Financial Conduct Authority (FCA) has proposed a consumer redress scheme for motor finance compensation claims following the recent Supreme Court ruling which was largely seen as a win for the banks. The estimated cost of the redress scheme is between £9 billion and £18 billion. Some level of further compensation payout had been expected by banks after the Court’s ruling. The proposed redress scheme would cover so-called discretionary commission arrangements – those where the broker could adjust the interest rate offered to a customer if they had not been properly disclosed. The regulator said it had not decided whether the scheme should require customers to opt in or be automatically included unless they opt out.
Shareholders of Banco de Sabadell S.A. have approved the sale of TSB Group to Santander Group for £2.65 billion in cash which analysts viewed as a strategy to stop BBVA’s takeover approach which aims to create Spain’s second-biggest bank.
During the month Moody’s placed TSB Bank plc on review-for-upgrade to reflect agency expectation that the Bank will likely be integrated into Banco Santander Group’s existing UK subsidiary, Santander UK plc. Moody’s also raised the outlook for UBS AG to “Stable” to reflect the meaningful progress of the Group in integrating the Credit Suisse Group and delivering on targeted gross cost savings as well as reflecting the Group’s solid capital position and future higher levels of profitability. In addition, Moody’s upgraded the long-term credit ratings of Commerzbank AG and applied a “Stable” outlook to reflect its strengthened capitalisation, improved profitability, its moderate reliance on market funding and its high quality customer deposit base. Finally, Moody’s raised the outlook of Société Générale S.A to “Stable” to reflect its improved profitability over the last year and agency expectations that asset quality will remain resilient over the outlook horizon despite the challenging economic operating environment.