Morning Brief – UK Interest Rates

Humphrey Percy
Chairman and Founder
Mon 31 Jul 2023

UK Interest Rates

A big week for the Monetary Policy Committee at the Bank of England which will meet and pronounce this Thursday: while the general expectation is for a rise of 25bps, there are plenty of hardliners who are calling for a draconian 50bp rise and of course there are still the doves who say that a pause in further rises is warranted given that the impact of the most recent rate rises has not yet fed through to the UK economy. Much has been made of some fixed rate mortgage rates being cut: the 2 year fixed now averages 6.81% down from 6.86%. While this minuscule cut may sound, well minuscule, it is the symbolism of a reduction however small that is firing up the rates are peaking lobby. All in all a cliff hanger of a week for GBP and UK interest rates.
GBP/USD 1.2850.

US Credit

The result of the multiple rises in US interest rates is that firstly US banks are cautious so they are not extending new credit and secondly Main Street are not in a hurry to raise fresh more expensive finance, so credit growth is at best flat and in some areas small negative. Credit card finance however is on the increase. This is a vagary of the market given that the differential between the average rates to borrow on credit cards and the Federal Funds rate is an eye watering 17%. Only 20% of credit card holders in the USA use them as a payment mechanism ie pay them off each month, so no money to be made from them by the banks. That leaves of course the 80% of serial refinancers and those who restrain themselves to a lower level of credit card finance. The spread differential at the times of the previous two most recent peaks in the rate rising cycles in 2000 and 2007 was a relatively modest 8%. For all sorts of reasons despite the demand for credit card finance in 2023, it would look as if the top of the US rate cycle is getting close given the spread to finance credit card purchases over the Federal funds rate.
USD/JPY 141.20.

Straits of Messina

Silvio Berlusconi the recently departed ex Italian PM announced a bridge between Sicily and the toe of Italy not once but twice in 2002 and 2008 only for his less profligate successors to cancel the projects. Now the Italian Transport Minister and also Deputy PM Matteo Salvini has dusted off those old plans and in an effort to differentiate himself from PM Giorgio Meloni has stirred up what is a hornets nest of rivalries. As is well known the Sicilian Mafia or Cosa Nostra is in control of Sicily while the rival organised crime faction the ‘Ndrangheta controls the southern part of mainland Italy. The many thousands-some say 10-of new jobs that will be created by the bridge project will challenge the two Mafia operations and their stranglehold on those economies. At EUR 13.5 billion this is by any definition a big deal and one that is a high stakes concept given the potential economic rewards as well as the fact that it will need to be paid for. Always a challenge in Italy.
EUR/USD 1.1020.

UK Universities

Big online article on Sunday afternoon about how UK universities despite their out put of Nobel prize winners and 4 top 20 global rankings, are in dire straits financially. The deficit per UK student stands at GBP 2500 per annum and it’s heading for GBP 4000 per annum given the rise in salaries and costs. Only 20% of students come from overseas and despite charging them a hefty premium over their UK fellow students, it is not enough to compensate for the growing gap between income and expenditure. What is truly surprising is that instead of asking the obvious question, UK universities are calling for a review as to how they should be funded or subsidized by the tax payer. The obvious question is why have universities not confronted the reality: a large proportion of the student intake should not be admitted and instead steered towards the world of work: Numerate, energetic, personable school leavers willing to work and learn, apply to SGM-FX.
GBP/EUR 1.1665.

Best of My Love

This day in 1980 US West Coast rock band the Eagles split up after two of their members nearly came to blows while playing a concert at Long Beach, California, USA. Don Felder and Glen Frey were singing this song on stage and both subsequently admitted that all they wanted to do was to kill each other. Probably best under the circumstances then.

Every night i’m lyin’ in bed
Holdin’ you close in my dreams
Thinkin’ about all the things that we said
Comin’ apart at the seams
We try to talk it over
But the words come out too rough
I know you were tryin’ to give me the best of your love

Beautiful faces and loud empty places
Look at the way that we live
Wastin’ our time on cheap talk and wine
Left us so little to give
That same old crowd was like a cold dark cloud
That we could never rise above
But here in my heart
I give you the best of my love
Oh… whoa oh sweet darlin’
You get the best of my love
(You get the best of my love)
Oh… whoa oh sweet darlin’
You get the best of my love
(You get the best of my love)

I’m goin’ back in time and it’s a sweet dream
It was a quiet night and I would be all right
If I could go on sleeping
But every mornin’ I wake up and worry
What’s gonna happen today?
You see it your way I see it mine
But we both see it slippin’ away

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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