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What is going on?...

I think we can talk for everyone when we think, what the hell is going on at the moment. After another base rate cut, the mainstream media are reporting that interest rates are increasing across mortgages. We wanted to clear up the situation and hopefully give a balanced view.  

Over the last few weeks, there have been some major global changes which have sent the markets into a bit of a wild ride. We had the labour budget, the Trump election, a base rate cut, UK wages data released& China going into meltdown. So what effect do all of these global events have on the UK?

London aerial skyline at night.

The effects of the Labour budget?

The first thing that caused the market's concern was the labour budget. The increase in NI, the increase of minimum wage and forecast government borrowing, all contributed to the fact this budget could have huge inflationary consequences. Essentially, this means it would be impossible for BOE to reduce interest rates as they would need to try and control these pressures. It is now forecast the low point of the base rate will settle around 4% according to 5-year SWAPS. Please note, the markets have been wrong in the past and should not always be a barometer of actions. There was once a point where 5-year SWAPS were forecasting base rate to increase to 6.5%...

What are the effects of the Trump administration?

Trump being elected may seem nominal to us in the UK, but it has global effects. There are talks of extra tariffs being put on Chinese companies which would cause the Chinese companies to increase their costs to the global market for everyone else. In short, we buy a lot from China! This means our cost to buy their products will, in theory, increase. This causes more inflationary pressures. There is a huge counter to this theory though, the fact China are going through a huge recession and have had to deliver huge stimulus packages recently. This means they will consume less oil, reducing prices, whilst also trying to drive the economy with cheaper offerings to counter the reduced demand. This is seen as deflationary and should help keep inflation from taking off.

With Trump set to reduce taxes, it causes another inflationary risk in the US, which essentially affects us in the UK. It is thought that the relationship between Labour and Trump would not be as strong, potentially causing trade frictions between the UK and the US. We await to see how this plays out.

Base Rate Cut, But Mortgages Increase?

According to BOE, there are 26% of mortgages on variable or tracker mortgages are directly linked to base rate. Unfortunately, fixed-rate mortgages are hedged off the SWAP market, which over the last 4 weeks has been steadily increasing, which, is why we are seeing lenders increase their fixed-rate mortgages. For all the extra inflationary risk, it is now thought that rates won’t be able to reduce as fast or as low.

The good news on the base rate cut is that the majority of commercial lending structures are hedged on base rates. If you look at large commercial mortgages, development finance facilities, large invoice discount facilities and so on, all of these facilities are usually hedged on base rate. This 0.25% reduction will help 90% of commercial and corporate businesses using these facilities across the country. We would welcome another few base rate cuts.

UK Employment data

Wages in the United Kingdom grew by approximately 4.8 percent in September 2024, although when adjusted for inflation, wages only grew in real terms by 1.9 percent. When bonus pay is included in wage growth calculations, wages grew by 4.3 percent in nominal terms, but by only 1.4 percent in real terms. This is the lowest increase in nearly two years.

The rate of unemployment stood at 4.3% in the three months to September, up from 4% the previous quarter, whilst the number of live vacancies fell again as it has been doing for two years. With the UK budget being quite onerous for businesses we can probably expect these numbers to geta bit worse over the next 6 months which should relieve a bit of the inflationary pressures from other areas of the economy. We believe the budget will give businesses restructuring excuses and blame the government for redundancies that were already about to happen.

What Now?

We believe there has been a short-term knee-jerk reaction in the SWAP markets. Over the next 6 months, we could see this settle down with the labour market continuing to slow. We have always been of the view that long-term SWAPS will settle around 3.5% and still believe this is true. In short, most people and businesses are skint now which means no money is being spent anywhere…

The property market has still not kicked on as expected. Sales across residential and commercial are still slow. Commercial valuations are taking a huge hammering at the moment across most asset classes. We believe the base rate reduction should help this, but it may take another 2 more cuts at 0.25% to have a positive impact on the commercial real estate market.

If you are in a buying position there is still a chance to take advantage of opportunities. We thought this opportunity may have been missed by now, but the base rate cuts will take time to effect. The latest data will be making current owners nervous and it is a great time to be acquiring.

If you own commercial or residential assets right now and are looking for an exit, our advice would be to look at options to give you time. This time could allow you to maximise your exit position next year. We have been restructuring some existing clients on shorter-term debt e.g. 2-3 years, which is giving them breathing room and then allowing them to reassess in the near future.

Please feel free to reach out to one of our advisers if you need time with your assets or if you are in a buying position there is some great pricing available. Banks are crying out to lend money at the moment. So a perfect storm of great pricing on debt, whilst getting a great deal on the purchase.