Behind British financial boosts lies pain

In the United Kingdom, interest rates have risen much earlier, faster and faster than on the European mainland. The advantage for the British is that the savings rate is well above 3% and the pound is quite strong. But behind these boosts lies a lot of pain.

High inflation and wet summer weather are not deterring British consumers. Retail sales in June were no less than 4% higher than in 2022. In July, that growth rate was almost 2%. This increase is remarkable, because households are spending more and more on mortgage payments. Moreover, it is becoming more attractive to put money in a savings account, where you receive an interest of more than 3%. Both cases are, incidentally, a result of the fierceness with which the Bank of England (BoE) is trying to get inflation under control. Earlier this month, the policy rate was raised for the fourteenth time in a row. The current level of 5,25% is well above the ECB interest rate.

Fifteen in a row
It must be strange if that series is not extended to fifteen interest rate increases in a row on September 21. That's when the BoE board meets and chairman Andrew Bailey was already preparing for a new interest rate move at the August 3 meeting. Economists are taking into account that interest rates will remain around the current level next year and will not fall again until 2025. That is a major setback for British households. On the other side of the Channel, it is customary to fix mortgage interest for a considerably shorter period than in the Netherlands. In recent quarters, many Britons have re-fixed their interest rates at levels two to three times higher than the original rate.

Tax banks instead of households
The interest rate hikes are now so painful in everyday life that activist group Positive Money protested in front of the bank building during the BoE meeting. Behind the masks of Bailey and Prime Minister Rishi Sunak, they called on the British government to tax the big banks more heavily, rather than the British people. For now, the BoE is not deterred by this. The bank is determined to bring inflation back from close to 8% to or below the target of 2%. As long as the key interest rate is considerably higher than in continental Europe and in many other developed markets, it is attractive for financial parties to hold their assets in pounds.

First it is the ECB's turn
The prospect of UK interest rates rising further in September - and likely to fall again much later than the ECB rate - only reinforces that tailwind for the pound. Incidentally, the currency world is not only looking at the BoE meeting of September 21. The policymakers of the ECB are already meeting a week earlier. If it then becomes clear that interest rates on the mainland will not rise any further for the time being, the interest rate differential with the United Kingdom can actually only widen. In that scenario, there is little to stand in the way of another pound rally.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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