Members of the Bank of England’s Monetary Policy Committee (MPC) all voted at the March meeting to keep borrowing costs on hold and said they were ready to act to see-off risks from war in the Middle East that prompted investors to ramp up their bets on higher borrowing costs later this year. Members voted 9-0 to hold Bank Rate at its current level of 3.75%. The MPC said inflation could go as high as 3.5% over the next two calendar quarters and that it was alert to the risk of higher inflation expectations becoming embedded in the UK economy.
The consensus view of the latest monthly Reuters poll of economists predicts that the Bank of England (BoE) will hold Bank Rate at 3.75% for the rest of the year. Economists have mostly abandoned their previous expectations for cuts but have not followed financial markets in expecting nearly three interest rate rises this year. The Iran war has lit a fire under energy prices and up-ended previous expectations that UK inflation would gradually fall, giving room for a few more interest rate cuts.
The BoE has proposed a new framework for banks’ liquidity that aims to improve their ability to convert assets into cash during stress events. The Prudential Regulation Authority (PRA) said the proposed changes build on lessons learned from the collapse of Silicon Valley Bank and Credit Suisse in March 2023. The changes are intended to make sure that those liquid assets that banks hold really are usable in the event of a run – rather than increasing the amount of liquid assets that banks have to hold. The PRA has put forward the plans in a three-month consultation process.
The BoE has raised the threhold for lenders to make resolution plans to exempt more small lenders from its requirements to set out detailed plans on how they would be broken up in case of failure. The BoE has said that firms with less than £100 billion of retail deposits would be exempt from its Resolution Assessment Framework which is up from £50 billion currently. The BoE believes that these changes reflect the reduced risks that smaller and less complex firms post to the UK financial system.
The UK motor-finance industry is expected to pay around £9.1 billion to compensate UK motorists for unfair vehicle loans under final version of the redress scheme announced by the Financial Conduct Authority (FCA) on the 30th of March. Although still one of the UK’s costliest financial mis-selling scandals, the headline number is lower than an originally proposed £11.0 billion amid pushback during a consultation with the banking industry and the finance arms of vehicle manufacturers. The finance providers, which have collectively set aside billions of pounds for compensation, will now review whether they need to adjust their provisions or legally challenge the scheme. Under its final scheme, the FCA said 12.1 million purchase agreements were eligible for redress.
Close Brothers Group (‘the Group’) has announced that it intends to cut around a fifth of its workforce by 2027 as it grapples with costs stemming from one of the UK’s potentially most expensive mis-selling scandals – as short-seller pressure by Viceroy Research sent its shares plummeting during the month. Viceroy (in a report) has alleged that the Group has systematically misrepresented its exposure to the Financial Conduct Authority (FCA) ahead of the release of the regulator’s redress scheme for millions of consumers who were given unfair motor loan deals between 2007 and 2024. The Group’s shares have fallen by 58% since January 2024 when the FCA launched its review.
During the month, Moody’s reaffirmed the long-term Bank Deposit rating of the Bank of East Asia Limited and improved the outlook to “Stable” to reflect the continued de-risking over the past four years which has significantly reduced its stressed commercial real estate (CRE) exposures in mainland China and Hong Kong as well as reflecting the Bank’s strong capitalisation which has alleviated the downward pressure on its credit profile. Meanwhile Fitch upgraded the long-term credit ratings of the Commonwealth Bank of Australia with a “Stable” outlook to reflect the strength of its earnings profile which the agency expects to be maintained as well as reflecting the build-up of junior debt buffers to address loss absorbing capacity (LAC) requirements.