Client Weekly Update – Friday 5 August

Interest rates rise by 0.5%

Vladimir Putin’s invasion of Ukraine has left Britain on course for a recession lasting more than a year and inflation above 13%, the Bank of England (BOE)  has warned as it raised interest yesterday rates for a sixth successive time.

Threadneedle Street said it had no choice but to increase borrowing costs by 0.5 percentage points to 1.75%, blaming Russia for the cost of living pressures not seen in more than four decades and a 5% drop in living standards straddling this year and next – the biggest since records began in the 1960s. 

Andrew Bailey, the Bank’s governor, said “there is an economic cost to the war”, as he predicted the economy was on course for a period of stagflation – a recession combined with a soaring cost of living.

While accepting the biggest increase in interest rates in 27 years would cause pain, particularly to the least well-off, Bailey said the Bank needed to take action to prevent spiralling price rises from becoming ingrained. 

If we don’t act now to prevent inflation from becoming persistent, the consequences later will be worse, and will require larger increases in interest rates,” he said. “Returning inflation to its 2% target remains our absolute priority, no ifs, no buts.”

Hinting that further interest rate increases were likely, the Bank’s nine-strong monetary policy committee (MPC) said it would be “particularly alert to indications of more persistent price pressures and will if, necessary, act forcefully in response”.

Why have interest rates gone up?

Parliament tasks The Bank of England (BOE) with keeping the rate of inflation at 2%.  Putting up interest rates is the main thing the UK’s central bank can do to stop prices from rising so fast and bring down the rate of inflation.

They set the UK’s key interest rate, (Bank Rate) It’s more widely known as ‘the base rate’ or just ‘the interest rate’. It influences all the UK’s other rates including any you might have for a loan, mortgage or savings account.

The BOE has raised Bank Rates gradually since December. The latest rise (yesterday) increased by 0.5%.

Why is inflation so high?

Higher energy prices are one of the main reasons why inflation is so high. Russia’s invasion of Ukraine has led to more significant increases in the price of gas. Since May, the price of gas has doubled. Those price rises are expected to push inflation even higher over the next few months, to around 13%.

Higher prices for the goods we buy from abroad have also played a big role. During the Covid pandemic, people started to buy more goods. But the people selling these have had problems getting enough of them to sell to customers. That led to higher prices – particularly for goods imported from abroad. 

There is also pressure on prices from developments in the UK. Businesses are charging more for their products because of the higher costs they face. There are more job vacancies than there are people to fill them, as fewer people are seeking work following the pandemic. 

That means that employers are having to offer higher wages to attract job applicants. And prices for many services have gone up.

How high will interest rates go?

The (BOE) will take the actions necessary to bring inflation down to 2%.

Precisely where interest rates will go depends on what happens in the economy and what they think will happen to the rate of inflation over the next few years.

So we can’t say now exactly how high they will go. But they are not likely to reach the very high levels that some people experienced in the past.

The BOE meets to review how the economy is doing and whether a change in interest rates is needed eight times a year (roughly every six weeks).

How will interest rate rises affect me?

If you have a loan or mortgage that charges you a variable interest rate, you might find that the cost of your repayments goes up.

If you have a £130,000 mortgage that you want to pay off over 25 years. If the interest rate on the mortgage is 3.5%, the monthly repayment will be £651.

But if the interest rate is 0.5% higher – the amount we raised interest rates in August 2022 – the monthly repayment rises by £35 to £686. If you’re on a fixed rate, you won’t see any change until your fixed period ends.

It’s important to understand how a change in interest rates could impact your ability to pay. If you have savings in a bank account that pays interest then you might see interest rates on your savings go up.

How do higher interest rates help to bring down inflation?

Higher interest rates make it more expensive for people to borrow money and they also encourage people to save. The result is that, overall, people will tend to spend less.

If people spend less on goods and services overall, then the price of those things tend to rise more slowly. Slower price rises mean a lower rate of inflation.

The action The BOE take to keep inflation low and stable is called monetary policy.

Mini-Budget to tackle cost crisis

Tax breaks, social security cuts and benefits increases are among a string of government proposals to help islanders cope with the growing cost of living crisis. Chief Minister Kristina Moore said she would use a mini-budget when taking on the island’s top political job to help the thousands of islanders struggling with rising prices.

The most recent Retail Price Index report, which measures the change in the price of goods and services purchased by an average household, marked the annual rate of inflation at 7.9% – the largest 12-month jump since September 1991-and an increase of 1.9% from the previous quarter.

Last year inflation was 3.5%.

Soaring housing, energy and motoring costs were among the biggest contributors. On Tuesday Treasury Minister Ian Gorst and Social Security Minister Elaine Miller announced a package of proposals which will be put before the States Assembly when it reconvenes in September following the summer recess.

Deputy Gorst Said ‘During the election campaign the rising cost of living was one of the main issues raised on the doorstep and our 100-day plan committed us to introducing the mini-budget. 

Its key aim is to address the current cost of living crisis for islanders particularly those that are being hardest hit’. 

Deputy Miller added, ‘my aim is to make sure we are continuing to support lower-income islanders and give them the additional help they need to combat the rising cost of living’.

British Airways suspend ticket sales

Islanders will be unable to book return flights with British Airways from Heathrow until 8 Ports of Jersey have confirmed. It comes after British Airways announced that it was suspending ticket sales on short-haul flights from the London airport in order to comply with a cap on passenger numbers.

Robin MacRae, Jersey Airport director, said: ‘The decision by British Airways to suspend ticket sales on short-haul flights from Heathrow will affect flights to Jersey. Passengers can book flights from Jersey to Heathrow during this time, but not from Heathrow to Jersey’.

‘The airline has made the decision to comply with Heathrow’s cap on passenger numbers. The airport has placed daily limits on the number of passengers who can fly from Heathrow.’ 

He added: ‘British Airways has said that this suspension of short-haul ticket sales from London Heathrow will remain in place until 8 August. British Airways flights from London City and London Gatwick to Jersey are unaffected.’ 

Last month, British Airways announced plans to cut 10,300 short-haul flights to and from London Heathrow, Gatwick and City airports. The announcement meant that almost 30,000 flights have been taken off the airline’s schedule between April and October this year.  

Mr MacRae said it was unclear what the impact would be on Jersey.

Two-digit reg plate sells for record £139,000

A two-digit registration plate has sold at auction for a six-figure sum. J72 eventually went for £139,000 at Glencoe Auction Rooms in St Lawrence on Wednesday, a record for a two-digit registration plate. 

Two bidders battled it out for the prized item, which was assigned to a 1999 Honda Civic 1.6 estate, with bidding opening at £90,000.

The purchaser was a private individual who wished to remain anonymous, according to Simon Drieu, principal at Simon Drieu and Co. Auctioneers and Valuers. The record for a registration plate at auction stands at £380,000, which J4 – the Lieutenant-Governor’s number – went for in 2020.

Licence to bill previous sales for two-digit registrations:

– May 2021: J74 – £101,000

– October 2020: J69 – £103,000

– June 2019: J68 – £91,000

Mixed Markets

FTSE 100 is down 0.13%, while in the European markets, the DAX is higher by 0.05%, and the CAC 40 is down 0.41%.

US stocks closed mixed Thursday, with the Dow industrials notching an 0.3% loss, the S&P 500 roughly flatlining and Nasdaq eking out a gain of 0.4%.