With the war between Iran and the U.S./Israel only a few days old, it is too soon to tell how the conflict in the Middle East will impact the UK’s sluggish economy. Financial markets have since curbed their bets on interest rate cuts across central banks, reassessing the risk of energy-driven inflation as several Gulf countries shut some of their capacity. Traders now see less than a 50% chance of a Bank of England (BoE) interest rate cut in March, compared to nearly 80% before the conflict started.
Bank of England (BoE) Governor, Andrew Bailey, has said that an interest rate cut in March is a possibility, although services price inflation in recent data had not fallen as much as hoped. Mr. Bailey told members of the Treasury Select Committee that it is a genuinely open question at the moment. Mr. Bailey reiterated the BoE’s view that headline inflation was likely to fall sharply to around the central bank’s 2.0% target in data for April which is due to be published in May. Asked about the U.S. Supreme Court’s ruling that President Trump exceeded his authority by introducing sweeping trade tariffs, Mr. Bailey said that was probably not to the UK’s advantage, given it already had relatively low tariffs with the U.S.
The consensus view of the latest monthly Reuters poll of economists (which was conducted before the outbreak of the Iran war) predicts that the Bank of England (BoE) will cut interest rates in March and is expected to follow up with a second reduction later this year. At its February meeting, the BoE held Bank Rate at 3.75% in a knife-edge 5–4 vote which was the third straight narrowly split decision by the Monetary Policy Committee (MPC). BoE Governor, Andrew Bailey, who has switched positions in recent meetings, voted to keep interest rates unchanged. Over 60% of respondents expected the BoE to cut Bank Rate by 0.25% to 3.50% at its meeting on the 19th of March. Of the rest, 30% expected a cut in April. Median forecasts continue to show interest rates at 3.25% by the end of the year.
Some Western banks have flattered their equity ratios by shifting losses on £650 billion of loans by employing financial engineering. Under this scenario, a bank takes a portfolio of loans and transfers a portion of the default risk, through synthetic derivative contracts, to one or more third parties – typically hedge funds or private-capital managers. To date the Basel Committee on Banking Supervision (BCBS) have not agreed a common name for these transactions but leading practitioners (such as Barclays Bank plc and Banco Santander SA) favour the label “significant risk transfer” (SRT). The synthetic structure approach means that the loans stay on the balance sheet of the relevant bank which also retains some exposure and keeps a relationship with the end borrower. SRT investors promise to cover a portion of the losses and in return receive a premium – which in the European market right now is between 8% and 10% in annualised terms. By shifting the exposure allows a bank to significantly reduce the common equity Tier 1 (CET1) capital required for a corporate loan portfolio.
Standard Chartered Bank has been indicted in a substantial Australian lawsuit of up to $4.8 billion – which also involves a number of other financial institutions – by two companies in liquidation, Jabiru Satellite Limited and NewSat Limited. The claimants allege that the defendants breached implied obligations under 2013 loan agreements and acted unconscionably by declining to waive breaches and events of default and by refusing to continue funding their satellite project, ultimately resulting in the claimants entering receivership.
During the month, Moody’s upgraded the long-term Bank Deposits rating of Danske Bank AB with a “Stable” outlook to reflect its stronger financial fundamentals and the agency view that the Bank has emerged from a multi-year period of governance remediation with a stronger risk-management foundation following the completion of the three-year probation imposed by the U.S. Department of Justice (DoJ) which marks the final closure of the historical Estonian AML indiscretions. Moody’s also raised the outlook for Deutsche Bank AG to “Positive” to reflect the agency view that the Bank has materially strengthened – and further diversified – its earnings profile, while improving its capital generation capability as well as maintaining its robust liquidity buffers and its conservative risk profile as the Bank starts to implement its 2028 strategic plan.