The Bank of England’s interest rate hike was sensible, but an increasingly likely hard Brexit will undo that economic progress

Such was the weight of market expectations that the Bank of England (BoE) would raise rates, that failing to enforce a hike would have caused a minor panic – with investors asking what the Bank’s Monetary Policy Committee (MPC) knows that the rest of us do not.

So it was hardly a shock when they did. As with the last increase, it was the smallest step upwards the Bank could practicably take, and it still leaves rates at historically low levels. A more normal pattern of interest rates, such as obtained before the financial crisis, would be closer to 5 per cent, say, than zero. We’ve become accustomed to very cheap money, which is a dangerous thing in the long run.

Bank of England Governor Mark Carney: Brexit has already hit UK GDP by up to £40bn

Still, businesses and mortgage holders will be squeezed a little more, which is the point – to make it harder for the shops to raise their prices. The Bank senses, rightly, that the current trend of wages growth and strong employment figures could convert into home-brewed inflation across the two-year horizon that policy makers try to peer into.

Even with the economy growing sluggishly, and all the uncertainties surrounding Brexit, those inflationary pressures have been slowly building for a year or two, and the Bank has acted to preempt them turning into a self-fuelling wage-price spiral. What’s more, with the financial crisis having passed some time ago, the banks no longer have such need for easy money to stay liquid, and some of the BoE’s other schemes to support business lending and the property market have been quietly dropped.

We are, then, on the road to normalising interest rates, almost a decade on from the emergency cuts that brought them to 300-year lows. Yet the economy is about to enter a highly abnormal phase – Brexit. With the probability of a hard Brexit increasing, the BoE should now refrain from raising rates until the picture becomes clearer, or as clear as it ever gets with Brexit, after the formal leaving date of 29 March 2019. If the worst predictions come true with a “crash out” of the EU, the BoE may even need to take action to underpin the financial system and the wider economy in the light of unknowable consequences.

A sudden rupture of trading patterns and financial contracts would constitute an external shock every bit as destabilising as the 2008 banking crash, or the oil crises of the more distant past.

There is, after all, a close and recent precedent for hard Brexit, which is the aftermath of the unexpected EU Referendum result in 2016, when sterling crashed and the BoE had to act, successfully as it turned out, by slashing rates to just 0.25 per cent to protect financial stability and the real economy alike.

Whatever may be said about Project Fear, and the BoE’s role in it, the economic effects of that political shock were immediate. A weaker pound therefore seems an inevitable consequence of a hard Brexit (or even a soft one) and will pose a nightmarish dilemma for the BoE, as it will also mean higher “imported” inflation feeding into the system, even as the domestic economy weakens.

The BoE will also be aware that a disorderly exit will affect billions of pounds, dollars and euros worth of financial contracts across Europe, previously predicated on the EU membership, EU law, the EU Court of Justice, and EU freedom of movement of capital.

Europe’s financial “plumbing” runs through the City and Canary Wharf; what will happen if it suddenly becomes blocked? What will happen if euro-denominated deals must be legally cleared, or settled, within the EU, not London? Central banks across the EU and the BoE will need to take evasive action to limit the chaos, including on interest rates. Journalists on Brexiteer newspapers can idly blame Barnier, Merkel and Macron, but that won’t settle a single derivative deal. Someone will need to clean up the mess.

Because the path of the economy in such circumstances is difficult to predict, how weak the pound will be for how long is also hard to judge. If history is any guide, then, as in the 1970s, the deterioration of the external worth of the British currency may be more or less unrelenting.

Central banks do not like to have to lower rates midway through an orderly path to raising them, and having to do so next spring after hard Brexit would be disruptive in every sense. Such a scenario might have been avoided had the BoE not pushed the rates higher now. Either way the case for extreme caution on future rate rises is plain. The BoE, for obvious reasons, prefers not to get embroiled in the Brexit debate, but it simply cannot pretend it isn’t there or is economically neutral. At the moment the BoE seems a little in denial about the very thing they warned so hard about in 2016 – a post-Brexit recession. A U-turn probably awaits governor Mark Carney and his colleagues, say around the time of the MPC announcement in February 2019.

How a a £15,000 loan led to a 1,500 residential property portfolio

Empire Property Concepts founder Paul Rothwell tells the Telegraph Business Club about his company’s focus on converting disused commercial property into residential accommodation

Paul Rothwell’s career in property development began while he was a student. He used a £15,000 loan from his dad to buy a house and convert it into flats for himself and fellow students.

When he graduated, he didn’t sell the house but let it out and took out a second mortgage to help fund another.

That was how Empire Property Concepts (EPC) started out, and now, just 13 years later, it has a portfolio of more than 1,500 residential units across various portfolios.

Empire’s response to Permitted Development Rights (PDR) legislation was to set up a new company, Empire Property Holdings (EPH).

EPH issues Loan Notes across several Special Purpose Vehicles (SPVs) to finance EPC’s developments, focusing on converting disused commercial property into residential accommodation.

With interest rates low or negative, these Loan Notes offer sophisticated investors an innovative way to engage in the UK property market.


Company website:

Business sector: Consumer & Retail

Location: Doncaster, UK

Annual turnover: £4.5 million

Number of Employees: 16

Year Founded: 2009

Build-To-Rent Development Pipeline Exceeds 100,000

New research by Hamptons International proposes that the private rented sector will continue to grow despite recent policy changes.

Demand for rented property will be a key driver of the sector’s performance, due to long-term demographic changes and a consistent decline in homeownership levels as house price increases outpace income growth.

As a result, the estate agency forecasts that 20.5% of households will be renting in Great Britain by 2022, up from 19.4% in 2018, and that there will be six million households renting privately by 2025.

The research goes on to explore the different ways in which properties can appear on the market. For example, it estimates that around 80,000 homeowners decided to let their home out as they struggled to sell.

However, Hamptons predicts that the build-to-rent sector will become a larger part of the market, as it found the development pipeline will deliver more than 100,000 units, with more expected to come in the future.

Cash owners outnumber those buying with a mortgage, the research also highlights, noting that cash buyers have increased for 23 out of the last 25 years.

In 2017 alone, 65% of investors purchased using cash, equating to billion in property.

“The mass of cash in the market alongside increasing institutional interest is acting as an insulation to changes in policy. Creating a firm foundation on which the sector can continue to grow, particularly as the demand for rented homes will continue to rise,” the research concludes.

Banks push back BoE rate forecasts after growth data shock

LONDON (Reuters) – Banks scrambled to push back their forecasts for the next Bank of England interest rate raise after data on Friday showed a sharp and unexpected slowdown in Britain’s economic growth.

The new forecasts anticipate the next BoE hike to take place in August this year or as late as 2019.

Before Friday’s GDP data most economists had expected the central bank to tighten monetary policy in May.

The change in banks’ forecasts signals a much weaker outlook for the pound, which has been among the best performing major currencies in 2018.

Last week expectations of higher rates lifted sterling to its highest since the Brexit referendum in June 2016.

The likelihood that the BoE will not hike next month also means bond prices could rally further and presents a more volatile backdrop for the UK stock market.

UBS scrapped its estimate of a single rate hike in 2018 after the weaker-than-expected growth figures while Nomura, which has long been hawkish on UK interest rates, now sees a first hike in August.

Bank of America Merrill Lynch and Natwest Markets strategists pushed back their May rate hike calls to November.

“We view the (economic) slowdown as more serious, and see no prospect of hikes in 2018,” said UBS, the world’s largest wealth manager, in a note.

John Wraith, a UBS economist, said inflation could fall back to the central bank’s target of two percent later this year and that concerns about talks between Britain and the European Union over the terms of their divorce could resurface.

Market expectations of a rate hike in May tumbled to less than 20 percent from around 50 percent, after GDP data showed Britain’s economy slowed to 0.1 percent growth between January and March, the weakest quarter since 2012.

Earlier this month the market was pricing in a 90 percent chance of a rate rise.

The market is now also forecasting no more than one 25 basis point rate hike over the remainder of 2018, from a near-certain two rate rises expected a fortnight ago.

Sterling GBP=D3 tanked more than one percent to $1.3748 and government bond prices surged in the aftermath of the data.

Reporting by Tom Finn and Saikat Chatterjee, Editing by Tommy Wilkes and William Maclean

Number of Build-to-Rent Homes Under Construction Up 47%

The number of build-to-rent properties either completed, under construction or planned has risen significantly across the UK in the past year.

Analysis by Savills, commissioned by the British Property Federation (BPF), reveals there were 117,893 build-to-rent homes recorded across all the stages of development in Q1 2018; a 30% increase on Q1 2017.

Completions, as well as build-to-rent homes under construction, have grown substantially by 45% and 47% respectively, whilst properties in the planning stage have increased by 19%.

Of all the new build-to-rent homes either completed, under construction or planned, 60,530 (51%) are in London, followed by 29,600 in the North West (25%), and 13,009 across the Midlands and Yorkshire & the Humber (11%).

Ian Fletcher, the director of real estate policy at BPF, commented: “The build-to-rent sector is evolving quickly, with significant delivery in the regions and more houses, rather than just apartments, coming forward.

“Policy is also adapting, as to date the sector has grown without a planning blueprint. This is now changing. With the draft revised National Planning Policy Framework, local authorities will now have to specifically identify how many new rental homes their respective areas need.”

Meanwhile, Housing Minister Dominc Raab said: “The 45% increase in completed build-to-rent homes is good news, but we’re restless to do more.

“Our revised National Planning Policy Framework is a crucial next step in supporting the build-to-rent sector, reforming planning rules, and helping to deliver 300,000 homes a year by the mid-2020s.”

Recent analysis from Landbay revealed that rental payments across the UK amount on average to 52% of a household’s disposable income.