The Annual Report, published in a new format for the first time this year, includes a foreword by FSB Chair Andrew Bailey, who is also the Governor of the Bank of England. He said that in an increasingly fragmented and unpredictable world, where multilateralism is being tested, FSB members continued to find common ground and demonstrated commitment to addressing shared challenges, giving reason to be optimistic.

The FSB Chair notes that “the shocks of recent years have not undermined financial stability,” a testament to the reforms put in place since the global financial crisis.

Andrew Bailey also noted that the Financial Stability Board must continue to evolve to be fit for purpose in an ever-evolving world, a theme that will continue to guide the international body’s work. Also, the second phase of the Financial Stability Board strategic review of implementation will further address how to identify the causes of a slowdown in G20 reform implementation and how to encourage implementation more effectively.

As outlined in the body of the Annual Report, in 2025, the FSB, through its membership and in collaboration with international standard-setting bodies, continued to strengthen financial systems, enhance the resilience of global financial markets, and improve implementation of policy recommendations across industries and jurisdictions. Several longstanding vulnerabilities in the financial system during its ongoing surveillance, including rising sovereign debt levels and the rapid growth of Non-Banking Financial Institutions (NBFI).

In response, the Financial Stability Board completed work to address the financial stability risks related to leverage in NBFI and created the “Nonbank Data Task Force” to address data issues that prevent authorities from effectively assessing vulnerabilities in NBFI.

The FSB also reviewed the progress in implementing the 2023 global regulatory framework for crypto-assets and stablecoins, calling on authorities to address gaps and inconsistencies that could pose risks to financial stability. Regarding operational vulnerabilities, the FSB finalised an operational incident reporting exchange format.

The Financial Stability Board has emerged as the global standard setter for the resolution of financial institutions, and in 2025, it continued its work on this front to support authorities’ preparedness to respond to failures, including the production of policy guidance and enhancements to operational planning.

Image Credits: Bank of England

The post Andrew Bailey-led Financial Stability Board publishes its 2025 annual report appeared first on International Finance.

Across global banking systems, artificial intelligence is moving from back-office optimisation to the heart of credit decision-making. The shift is subtle. There are no public announcements declaring that machines now approve mortgages. Yet increasingly, algorithms analyze income, spending patterns, behavioural signals, and even alternative data before a human ever sees an application.

So, the question is unavoidable: Are machines deciding who gets loans? And if so, what happens to human judgement?

The Quiet Expansion Of AI In Lending

Artificial intelligence is already deeply embedded in financial services.

“AI is transforming banking quite significantly, and the pace of adoption is fast,” Wahyu Jatmiko, Assistant Professor in Banking and Finance at the University of Southampton Business School, told International Finance.

He points to data from the Bank of England and Financial Conduct Authority showing that around 75% of UK financial institutions were using AI by 2024, up from 58% just two years earlier.

However, he explains, the heavy use remains concentrated in internal optimisation, cybersecurity and fraud detection. In underwriting specifically, adoption is more measured.

“Roughly around 15% of firms use AI directly in credit underwriting,” he estimates.

That figure may sound modest. But the deeper shift is structural.

“Even where it is not fully taking over, AI is increasingly embedded in the process,” Jatmiko says.

Instead of relying entirely on traditional credit bureau scores, systems now analyse real-time transaction data, behavioural patterns, and alternative datasets.

The result is not necessarily that machines approve all loans. Underwriting is becoming faster, more data-driven, and far more granular.

James Ekpa, an AI researcher at the Blockchain Technology Association for Black & Minority Ethnic Engineers (AFBE-UK), did not mince words.

“Yes, machines are increasingly deciding who gets loans today,” he told International Finance.

He sees a transformation from slow, manual processes to rapid, automated systems powered by machine learning algorithms.

Speed, consistency and scalability are among AI’s biggest advantages. Decisions can be made quickly. Models apply the given criteria uniformly. And, algorithms can analyse thousands of variables at a scale humans simply cannot match.

Efficiency, in other words, is no longer the differentiator. It is the baseline expectation.

Enhancement Or Replacement?

But, does faster mean better? And more importantly, does faster mean human judgement is fading?

“At the moment, I clearly see AI as enhancing human judgement rather than replacing it,” Jatmiko says.

He cites UK data suggesting that while about 55% of AI applications involve some automated decision-making, only around 2% are fully autonomous.

Creditworthiness, he argues, is not merely about predicting default probabilities. It involves context, borrower circumstances, regulatory constraints, and sometimes ethical considerations.

AI excels at analysing large datasets, document reading, income verification, and affordability calculations. In that sense, Jatmiko says, it acts like a powerful analyst. But final approvals, particularly for complex or high-value loans, still rest with humans.

Ekpa agrees that the human role is evolving rather than disappearing. Loan officers today increasingly review edge cases and borderline applications. They handle complex deals. They explain decisions to customers. They monitor model outputs and escalate anomalies.

The job is changing. It is becoming supervisory. That may be the real transformation.

When Context Meets Code

The limits of automation become clearer when qualitative factors enter the picture.

Jatmiko describes a hypothetical but realistic scenario: a small business reporting temporary losses due to a supply chain shock while holding strong long-term contracts. A human underwriter may interpret the broader narrative and take a forward-looking view. An algorithm trained primarily on historical default data might simply detect recent losses and flag high risk.

“There is research showing a mismatch between what AI models consider important and what human loan officers see as meaningful indicators of creditworthiness,” he explains.

Humans can contextualise. They can sometimes account for structural disadvantages when justified by circumstances. AI, by design, optimises patterns found in historical data. That difference is subtle. But in lending, subtle differences affect livelihoods.

The Question Of Bias

Advocates of AI argue that machines eliminate prejudice. Algorithms do not discriminate intentionally. They do not favour friends. They apply rules consistently. And that consistency is powerful.

But, consistency applied to flawed historical data can create new problems.

“AI can reduce certain types of human bias, but it can also embed and even amplify systemic bias,” Jatmiko explains.

If past lending patterns reflected unequal treatment of certain demographic groups, models trained on that data may internalise those patterns as objective signals of risk.

Ekpa echoes this concern. One of the primary risks, he notes, is bias amplification. If historical data contains discrimination, models may encode and intensify it.

Transparency is another issue. Complex models can be difficult to explain. Borrowers denied credit may receive little more than a generic explanation.

“Opacity raises regulatory and consumer trust concerns,” Ekpa warns.

Then there is model drift, when changing economic conditions gradually degrade model performance. Without continuous monitoring, systems may misprice risk during volatile periods.

In short, bias does not disappear. It changes form.

Accountability In An Algorithmic Age

If an AI-driven system denies a borrower unfairly, who is responsible? The answer is not always clear. Multiple actors are involved – AI manufacturers, developers, third-party providers, and lenders themselves.

However, both experts converge on one principle: accountability ultimately rests with the financial institution.

Ekpa says AI is a tool, not a legal entity. Financial institutions remain responsible for the models they deploy, the data they use, and the governance frameworks they maintain.

Jatmiko does not overcomplicate it. If a loan decision turns out to be unfair, the algorithm cannot be the one blamed. The bank chose to use it, so the bank carries the responsibility. That means senior leaders cannot hide behind technical language. They have to stand behind the outcomes.

He stresses that human oversight is not optional, especially for complicated or sensitive cases. Models need regular checks. They need to be tested for bias. They need proper audit trails. Otherwise, problems build quietly.

He also worries about something bigger. If many banks start depending on the same AI providers, risk can pile up across the system. One flaw could affect more than just one institution. Efficiency is important. But, it cannot come before accountability.

The Islamic Finance Lens

From an Islamic finance point of view, this is not just a technical debate. It goes deeper than that. Islamic banking is guided by Maqasid al-Shariah, ideas around justice, fairness, and social welfare. Lending is not only about numbers on a balance sheet. It carries a social responsibility.

Yes, AI can make processes smoother. Faster approvals. Cleaner risk models. That part is clear. But Jatmiko flags something more subtle. If the data used to train these systems reflects a past where small businesses were routinely sidelined, the algorithm may quietly repeat that history.

And if that happens, the technology could end up working against the very goals Islamic finance is supposed to protect. Not intentionally, but just by following patterns.

Aligning AI with ethical principles requires intentional intervention in model design and governance. It may require bringing social scientists into AI development processes. It may demand stronger oversight, particularly when tools are sourced from third-party providers.

Technology alone does not guarantee fairness. Design choices matter.

Possibility Of A Hybrid Future

So, where is banking headed? Fully automated lending systems may emerge in low-risk, low-value segments. Routine cases can be processed at speed and scale. But both experts see the broader future as hybrid.

Ekpa believes competitive advantage will come from institutions that combine AI’s analytical power with human judgement, rather than eliminating one in favour of the other.

Jatmiko similarly expects automation to expand, but insists that human supervision will remain essential, especially for complex or high-impact decisions.

Human-in-the-loop processes are already becoming common. Algorithms analyse. Humans validate. Decisions are checked before final approval. Perhaps, the future banker will not be replaced, but repositioned.

The Big Question

For borrowers, the shift may be invisible. Applications are approved faster. Rejections arrive more quickly, too. What changes quietly, beneath the surface, is how those decisions are made.

Is human judgement fading? Or simply moving further upstream, designing and supervising the systems that now perform the analysis?

The rise of the AI loan officer is not dramatic. No headlines are announcing the end of human bankers. Instead, there is gradual integration, more data, faster models, and shorter decision times.

Machines are increasingly involved. That much is clear. But whether they ultimately decide, or merely assist, depends less on technological capability and more on governance choices.

Banks can treat AI as an efficiency engine. Or, they can treat it as a tool that augments, rather than overrides, human responsibility. The distinction may determine not only how loans are approved, but how trust in the financial system evolves in the years ahead. And trust, unlike data, cannot be automated.

The post Are humans making way for AI loan officers? appeared first on International Finance.

According to the latest figures from job search platform Adzuna, the average advertised salary hit £42,278 in April 2025, a rise of 8.9% year-on-year, marking the steepest annual increase since June 2022. Every month, salaries rose by 0.75%, further complicating the central bank’s efforts to justify additional interest rate cuts.

The Monetary Policy Committee (MPC) of the Bank of England is now witnessing its key members, including the Bank’s chief economist Huw Pill, expressing concern about elevated wage growth, warning that loosening monetary policy too quickly could reignite inflationary pressures.

According to Adzuna, vacancies rose slightly by 1% year-on-year to 862,876, but were down 0.95% compared to March, suggesting a mixed picture for hiring momentum.

What’s going on?

Sectors seeing the strongest demand for workers included healthcare, which hit its highest vacancy level since January 2023, as well as hospitality, logistics, teaching, and retail. The construction and trade sectors recorded a sharp 15.2% decline in vacancies, reflecting cooling activity in those industries.

The BoE had been hoping for a clearer signal that inflationary pressures were easing before committing to a series of rate cuts in the second half of 2025. However, April’s inflation surprise, which saw the consumer price index jump to 3.5%, up from 2.6% in March, has prompted fresh caution.

Although the ONS reported a slight slowdown in overall wage growth, down to 5.6% in Q1 from 5.9% in Q4, starting salary trends suggest that employer competition for skilled staff remains high, particularly in regions with labour shortages. The MPC has a dilemma: to stay with rate reductions to stimulate growth, or pause to prevent an inflationary rebound.

A Chartered Institute of Personnel and Development (CIPD) study paints a different yet painful picture.

The report, titled “Labour Market Outlook – Spring 2025,” found employer confidence declining again this quarter, with the net employment balance falling to +8 — the lowest level recorded outside of the pandemic. Hiring intentions have softened, and one in four employers now plan redundancies, rising to 27% in the private sector.

Rising employment costs, including increases in National Insurance and the National Living Wage, are forcing many organisations to scale back recruitment, limit training investment, and consider price increases. Uncertainty around the Employment Rights Bill and global events adds to employers’ caution.

“The further softening in employment in April suggests businesses continued to respond to the rise in business taxes and the minimum wage by reducing headcount,” said Ruth Gregory, deputy chief UK economist at Capital Economics.

She also stated that despite a deceleration in wage growth, it remained relatively strong, meaning the Bank of England will remain cautious over future interest rate cuts.

For BoE, the key concern is that if earnings grow quickly, firms will seek to push up prices, thereby putting up the inflation rate.

As per Gregory, sticky wage growth (a situation where wages do not immediately adjust up or down in response to changes in labour market conditions) may mean the bank remains uneasy about inflationary pressures in the near term.

Wage hike: A new battlefield?

The Bank of England has noted that wages have quietly continued to rise, raising concerns that this could indicate a seismic and more long-lasting shift in the relationship between workers and employers. In May, the European country announced its public sector pay awards, which were higher than ministers had previously said they could afford and outstripped higher-than-expected inflation.

Still, it failed to please the disgruntled doctors. In fact, the latter threatened to protest against the new pay structure. After teachers were awarded a 4% increase, teaching unions also responded angrily to the Keir Starmer government’s refusal to fully fund the deal and warned that it would damage the quality of education that pupils received. The largest union plans to take the first step towards possible industrial action.

The decision to award 1.4 million NHS staff, including nurses, midwives and ambulance workers, a smaller rise (3.6%) also met with anger. The Royal College of Nursing (RCN) said it was “grotesque” to hand doctors a bigger increase than nurses who earned less than them.

Wes Streeting, the health secretary, and Bridget Phillipson, the education secretary, sought to defend the rises by highlighting that they represented the second time public sector personnel had received above inflation pay rises since Labour took power in 2024.

Are we seeing a 2022 scenario being played out all over again? Back then, inflation not only rocketed, it led to a situation where, in a desperate scramble to keep pace with rising prices to protect their incomes, British private and public sector workers took widescale industrial action in a way that brought back memories of the 1970s. What followed was a series of pay deals thrashed out between bosses and employees, with unions often arguing they had been due pay increases for years.

When considering the British private sector, relations between bosses and the rank and file have already been redefined by a shift towards remote working caused by the COVID-19 pandemic, and then companies’ increasing insistence on more regular attendance at work. Despite the volatile background, Threadneedle Street policymakers now ask whether the wage increases indicate that the power balance has moved back in the direction of workers, allowing them to protect their finances. Data from the Office for National Statistics (ONS) has gone some way to justifying the BoE view.

According to payroll data from the ONS, wages in the hospitality sector rose sharply, with hotels and restaurants increasing staff pay by 8.5% in the year to April, well above the 3.5% inflation rate. Retail workers also saw gains, with median pay rising by 6.9% over the same period. Across the economy, average wage growth reached 6.4%.

Recently, BoE chief economist Huw Pill said the UK’s labour market was becoming less flexible, suggesting employers were no longer able to freely hire and fire as they once could. Businesses, charities and public sector organisations have been laying off staff and freezing job adverts, but those staff who stay behind are well rewarded.

Ben Caswell, an economist at the National Institute of Economic and Social Research (NIESR), said, “Wages adjusted for inflation have returned to where they were before the cost of living crisis began in 2021. And the share of overall national income that is secured by workers rather than firms has also recovered to 2021 levels. While the average pay figures disguise many winners and losers, the aggregate figure showed most workers had benefited from inflation-busting pay rises to recover lost ground.”

He also focused on a slightly less up-to-date measure of pay based on employees’ average regular earnings over a rolling three-month period. This showed a rise in Great Britain that was still well above inflation at 5.6% in January to March 2025, though not as much as the PAYE data shows.

Caswell sees a series of minimum wage increases, closing the gap with the average wage, which is likely to fuel further pay rises as companies attempt to maintain a significant difference between the salaries of those on the bottom rung and the semi-skilled workers and middle managers above them.

What to expect next?

James Smith, research director at the Resolution Foundation, said that the weakening economic outlook worked against a prolonged recovery in pay.

He noted, “If we believe that wages consistent with the Bank of England’s 2% target would be about 3.5%, then we are well above that level at the moment. And that would give the Bank good reason to be cautious about cutting interest rates. However, other pay surveys are showing earnings rising at a much slower rate, so the official figures might be a bit like Wile E Coyote and about to be brought down to earth.”

Emphasising the likely short-term nature of the current bumper pay rises, the bank’s regional agents say employers are limiting pay rises to between 3% and 4% by the end of 2025. The Starmer government is not planning to pay more than 4% to public sector workers on average, and more departmental budget squeezes may be coming up.

Talking about other industries, take the hospitality sector, for example, which is known to employ a high proportion of minimum wage workers, and the same applies to the retail industry, boosting pay in 2025.

Senior journalist Phillip Inman claimed that most likely not next year or the year after, the legal minimum salaries will start rising more slowly.

Seemanti Ghosh, principal economist at the Institute for Employment Studies, sees the significant return to office-related demands from the companies as direct evidence of worker power reaching its limits. There has also been a gold rush for digital skills, which will result in another paradigm shift in the labour market.

Employers had to pay higher wages this time around, as they needed to retain skilled staff and pay them more while they embarked on a search for workers who were more adaptable in an ever-changing work environment.

“If wage increases are not driven by negotiations with unions, then they are due to employers wanting to hang on to skilled staff. This matters for all companies that increasingly rely on soft skills for things like project management and tech skills in other areas. We also see it in the green sector, where there is a shortage of people with the skills the industry needs,” Seemanti remarked.

How much of this dislocation is systemic and will keep wages higher for longer will be a subject of debate for the rest of the year. Pill advocated for keeping interest rates elevated while the trends become clearer, believing there is less damage from higher rates than letting inflation run away again.

Other MPC members disagree, arguing that businesses cannot invest in skills training while borrowing costs are prohibitively high.

It reflects a starkly different view of the labour market, one that emphasises the lasting damage caused by rising job losses and prolonged economic stagnation.

Swati Dhingra and Alan Taylor want rates to come down quickly. Who wins the argument inside the central bank could dictate whether workers or bosses have the whip hand in the great tussle over pay.

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The frequency with which the topic is brought up at high-level conferences is one indicator of how concerned international policymakers are about the extraordinary rise in global debt. It also comes up almost every week. In April 2024, International Monetary Fund (IMF) Managing Director Kristalina Georgieva told the Atlantic Council that she was concerned the current decade would be regarded as “the turbulent 20s.”

Across the world, the primary topic of discussion is debt, which is undoubtedly rising every day. The figures provide cause for concern. Gross borrowing for the 38 member countries that make up the so-called OECD region increased by precisely $2 trillion in 2023, from $12.1 trillion to $14.1 trillion. It will worsen: the OECD projects an additional $1.7 trillion increase in 2024. Even while the United States was the main offender, borrowing almost two-thirds of the $14.1 trillion in 2023, it is evident that this puts pressure on the global debt markets, whose ability to issue debt is limited.

Currently, there is a significant amount of debt in the markets. It is expected that the total borrowings, known as “outstanding marketable debt,” for 38 governments will reach $56 trillion by 2024. If that figure is striking, consider that it has increased by $16 trillion in just the last five years. This will mark a record level of debt.

The average debt-to-GDP ratio is likewise abnormal, which is possibly much more worrisome. From 73% in pre-COVID to roughly 83% in 2023, it has increased in real pre-inflation terms. And by the end of 2024, it will undoubtedly have increased. Meanwhile, interest rates are getting close to 3% of GDP, making new borrowing more expensive.

Pouring in more trillions

The performance of emerging markets is suffering. In 2023 alone, around $1 trillion more in sovereign bonds were issued in the so-called EMDEs (emerging market and developing economy) countries, bringing the total to $3.9 trillion.

China has a strong and quickly expanding appetite for this type of debt, even though it is hardly an EMDE. It now accounts for 37% of emerging nations’ bonds, up from 15% in 2021. Many issuers, both inside and outside of China, are alarmed by that figure.

It should come as no surprise that EMDEs borrow more against less because their economies are not expanding quickly enough, their credit ratings are declining, and the cost of debt is rising in tandem. According to the OECD, there were at least 24 downgrades and six upgrades in the group of low-income and lower-middle-income countries, which includes about 130 countries with an average per capita GDP of $12,300.

The unfavourable outcome is that the amount of outstanding governmental debt has increased to previously unheard-of proportions. Even though longer payback periods and inflation appear to improve these ratios, the debt still requires repayment. For many countries, it represents an imminent threat.

The makeup of the debt is just as important as its amount. The United States, the largest economy in the world, could have to refinance at least a third of its public debt by 2024, according to the OECD’s annual analysis of global debt. That is a minor issue of $11.3 trillion. The US Treasury will undoubtedly be in charge of the effort, but as the economic advocacy group Peter G. Peterson Foundation notes, it amounts to around $103,000 for each and every American.

According to the foundation, the cost of an ageing population, underfunded services, and other long-term contributing factors are some of the reasons why America’s debt load has been increasing for years: “a mismatch between spending and revenues.” The United States can at least bear its debt.

The OECD observes that “decisions on debt composition become even more intricate in emerging markets.” The Paris-based organisation characterises this as “exposure to fluctuations in global risk sentiment in an increasingly shock-prone world,” which is the reason they must deal with rising volatility.

IMF Deputy Managing Director Gita Gopinath is another policymaker who has often expressed her concerns. At a Washington conference titled Fiscal Policy in an Era of High Debt in late 2023, Gopinath presented concerning statistics regarding the long-term and rapidly rising levels of government debt. Global public debt has tripled since the mid-1970s and accounts 92% of GDP in 2022. Therefore, debt levels had been increasing for a while.

“Rising deficits and debts in countries such as the US have serious ramifications for emerging and developing economies, which are hit by rising rates and weaker currencies,” Gita Gopinath said, in sobering economic terms, presenting a grim picture, particularly for economically weaker nations. Additionally, many economies are already experiencing debt hardship, especially low-income nations.

Fractured fiscal rules

The old, more convenient regulations have been broken for several reasons, which is one of the numerous challenges involved with lowering global debt. One is the global financial crisis (GFC) of 2008, which overnight resulted in previously unheard-of amounts of quantitative easing, whereby central banks printed money and lent it to the financial sector at extremely low interest rates to support them.

Another issue is that, despite having their own fiscal policies, most countries are finding it increasingly challenging to adhere to them and are resorting to debt issuance to sustain economic activity. The OECD laments the “frequent deviations from the rules.” Since the GFC, few have managed to control their debt.

More discipline, supported by a form of fiscal police, is the OECD’s suggested remedy.

The OECD suggests, “We need rules anchored on spending targets that respond to shocks and have clear mechanisms to correct for non-compliance.”

Independent fiscal councils can also strengthen checks and balances.

Others, meanwhile, believe that a new form of economics is required. Atif Mian, a professor of economics, public policy, and finance at Princeton University, cautions that relying on credit to increase demand endangers the global economy and that the fundamental imbalances must be fixed.

However, until then, we have what he refers to as “a massive debt supercycle that threatens the global economy.” He continues by advocating for a “long-term balance between what people earn and what they spend” in an article published in the esteemed Finance & Development journal. One of the 21st century’s most urgent concerns is to break that loop.

Nevertheless, habits must shift before that may occur. The US and other mostly prosperous countries have made government (or sovereign) borrowing all but mandatory. Additionally, citizens who expected ongoing generosity from a country that could barely afford it criticised governments like Britain for using “austerity economics” when they attempted to lower their debt in the wake of the Great Financial Crisis. When the Macron administration tries to follow other countries and gradually raise the pension payout age, France is running into the same issues—riotous protests, in fact—which are slowly destroying the entire economy.

Accumulation of debt

Debt binges have been increasing for more than fifty years, beginning when the effects of the Great Depression started to subside. For instance, the United States’ overall debt more than doubled to 300% of GDP after hovering at 140% of GDP between 1960 and 1980. The American example has also served as a lesson to the rest of the globe.

According to Professor Mian, “Debt’s unrelenting upward trajectory could not be stopped, not even by the Great Recession of 2008 (the outcome of the GFC), which was largely caused by excessive borrowing.”

It would be incorrect to assume that 2008 was just the result of a few regrettable policy errors. Deep structural imbalances in the economy were the cause of the debt accumulation that precipitated the 2008 crisis. Both those inequalities and the risks they pose continue to exist.

However, what is the source of this hazardous imbalance and excessive debt? Most scholars agree that, ironically, the surplus savings of wealthy individuals and nations are a major underlying cause of economic issues. It is undeniable that the wealthy are growing increasingly richer, a trend that has persisted throughout history.

For nearly 40 years, the wealthiest 1% of people have been accumulating wealth at an accelerating rate, with many benefiting significantly from the digital boom. Thus, some nations have become richer than others, most notably China, whose growing wealth is invested far more in local banks and other savings institutions than in affluent Western countries. They each assert a disproportionately larger amount of the world’s revenue, which leads to financial surpluses that feed the “global debt supercycle.”

Regrettably, due to the banking sector’s failure to meet its objectives, a significant portion of this debt tsunami is being misdirected. A healthy financial sector would direct financial surpluses toward productive investments, like constructing and maintaining infrastructure and developing technology. Since investment returns would cover any debt resulting from such productive lending, it would be organically sustainable.

Mian continues, “The debt supercycle’s inability to fund profitable investment is regrettably one of its main characteristics. Real investment as a percentage of GDP has stagnated or even decreased during the past forty years, despite the fact that total debt as a percentage of GDP has more than doubled. The worrying conclusion is that we are wasting around half of the trillions of dollars in new debt issued in the last two years. Rather than funding investments that might contribute to wealth creation, it has instead been used to finance governments’ and consumers’ wasteful spending.”

Naturally, only falling interest rates fuel this cycle. Long-term memory holders will recall that the US 10-year real interest rate was approximately 7% in the early 1980s. It has recently fallen as low as below zero. Ordinary people are encouraged to spend rather than save as high rates enter the consumer finance system.

Handling crises

Debt-related catastrophes have occurred behind the scenes, virtually invisible to the public.

Central banks, which are responsible for maintaining financial stability, have had to control disruptions in the quickly expanding non-bank financial sector that could have had disastrous repercussions if they had spread more broadly. Only skilful and mostly anonymous crisis management prevented the worst.

In a recent lecture, Nick Butt, head of the Bank of England’s future balance sheet branch, says that “these non-bank institutions have grown in significance across a range of markets, including those that households, businesses, and governments use to borrow, save, or access financial services.”

About half of all UK financial assets, including corporate loans, have been acquired by non-bank institutions in the last 20 years, essentially from a standing start. Similar events have occurred in other European nations, posing yet another risk to the stability of the financial system.

Why? The reason for this is that non-banks often utilise the gilt repo market and maintain substantial holdings of gilts, also known as sovereign bonds, both domestically in Britain and internationally. The Bank of England buys and sells gilt-edged securities here, albeit few outside of the financial community are aware of how it operates.

Established in 1996, this massive market witnesses billions of transactions daily to maintain the liquidity of the banking system. As other central banks have noted, Butt asserts that the impact of the rise of non-banks is far from theoretical. They have created new weaknesses and sources of liquidity risk that have an all too real potential to cause financial instability and have an effect on the broader economy.

Some may argue that the current situation is more actual than prospective. During the COVID lockdowns, the UK government’s bond markets experienced a sharp decline in March 2020 due to a widespread rush for short-dated, cash-like securities. As banks of all kinds tried to fulfil their own liquidity commitments, there was a rush for cash throughout the financial industry. To support the central bank, the major dealer banks contributed almost £50 billion through the gilt market, but it was insufficient, illustrating the anxiety that permeates a heavily indebted economy.

The money markets managed to survive the crisis, despite the pressure. Two years later, Britain experienced another crisis immediately following the abrupt “go-for-growth” economic policy of the short-lived prime minister Liz Truss. This time, the long-dated gilt market was particularly affected, revealing what Butt referred to as “vulnerabilities in liability-driven investment funds” that threatened the nation’s financial stability.

Liquidity is crucial, particularly when non-banks receive the dreaded margin call, and their own creditors become alarmed. Central banks and international authorities are currently making significant efforts to close these gaps before they become too large.

Twenty years ago, the US Federal Reserve, the Bank of England, and other major institutions faced a simpler time, when they only had to worry about the large retail and investment banks, and the world’s debt levels were lower.

Responsible titans of banking

Positively, the majority of large, systemic banks around the world are safer now than they were before the Great Financial Crisis. They have greater capital, the funds that are first in line to absorb losses, and are better positioned to safeguard depositors as a result of the lending excesses made public by that crisis. Although there are regional variances, the majority of nations have implemented the rules created by the Bank for International Settlements, and international regulators are now considerably more at ease with the financial industry’s titans.

The United States, which is meant to be the land of regulation, experienced three bank failures in early 2023 alone: Silicon Valley Bank, Signature Bank, and First Republic. Meanwhile, the Swiss government needed to save the once-dominant Credit Suisse before it collapsed. The Swiss government planned for rival UBS to purchase the bank for $3.25 billion in June 2023 after a quagmire of poor regulation and incompetent management.

There are worries that a much-feared run on social media will increase the likelihood of bank failures. Prominent European bankers conducted a provocative study that suggests “the sudden withdrawal of bank deposits, celebrated by digital technology, contributed to the failures of these banks,” highlighting the rapid spread of misinformation.

According to the report, “social media and mobile banking apps were unheard of or barely existed” during the catastrophic bank runs that preceded the Great Financial Crisis.

What’s next?

The tightrope act calls for a gradual reduction in global debt and much more prudent investment, that is, in areas of the economy that will provide the proper growth. The majority of economists still support GDP, but they do it in a more sophisticated and nuanced manner that emphasises what is best for both people and the environment.

In summary, this represents significant progress. However, some argue that the usefulness of growth, particularly debt-funded growth, has outlived itself. The “degrowth lobby,” led by Greta Thunberg, contends that living standards are currently adequate and that modern capitalism has been mistaken in concentrating on GDP.

Academic circles do not widely accept the concept that “good growth” improves lives. But as the 10th edition of this insightful study, the IMF’s most recent World Happiness Report, demonstrates, economic growth isn’t everything. Indeed, some of the happiest countries are the poorest.

“It is evident that, although GDP per capita is a strong predictor of happiness, it is not the only element when we compare it with the report’s happiness rankings. Additional factors, including life expectancy, social support, independence, charity, and the lack of corruption, also contribute to the explanation of the disparities in happiness among nations,” the report stated.

In other words, the relationship between GDP and behaviour is significant. For this reason, despite having a GDP per capita of only $20,000, Costa Rica, which is well-known for its economic philosophy of la pura vida, which aims to consider everyone’s well-being, ranks a high 6.61 on the Happiness Index, while incredibly wealthy Singapore comes in slightly below.

Remarkably, poor countries like Guatemala (6.15 at $8,262), Nicaragua (6.26 at $5,842), and Kosovo (6.37 at $11,690) rank only below Singapore. Afghanistan, ranked lowest at 1.86, and Lebanon, ranked second at 2.39, are unlikely to trail the de-growth winners.

A strategic thinker, IMF Deputy Managing Director Gita Gopinath warns high-borrowing, wasteful countries.

“Debt-financed spending may nevertheless seem alluring in the current climate, where it is politically challenging to reduce expenditure or raise taxes. However, as borrowing costs climb sharply, that would be a serious miscalculation that would put debt on an unsustainable track. What governments can and cannot do needs to be reconsidered. The government cannot serve as the primary safety net for every unforeseen event. Additionally, revenues must match expenditures,” Gita Gopinath remarked.

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The Office for National Statistics said that public sector net debt, excluding public sector-owned banks, increased from 99.3% in July to 100% of GDP for the first time since monthly records were kept in 1993.

According to Bank of England data, debt was last regularly at this level in the early 1960s, when the country was still recovering monetarily from World War Two.

Both both the COVID-19 outbreak and the global financial crisis, government debt skyrocketed. The increase as a percentage of GDP since then has also been aided by feeble economic growth.

Around 3.3 billion pounds more than in August of the previous year, the government borrowed 13.734 billion pounds ($18.29 billion) in August. A 12.4 billion pound deficit was indicated by a Reuters poll.

The data revealed an increase in current spending and social benefit spending, which was indicative of higher-than-normal inflation.

Rachel Reeves has cautioned that taxes will rise in her budget, which is due on October 30. However, she has excluded raising the rates of income, corporate, and value-added taxes, meaning there is little space for improvement in public services and increased investment.

During an interaction with Zawya, PwC economist Gora Suri said, “The August public finances figures highlight the challenging fiscal position facing the Chancellor ahead of her first budget.”

During the first five months of the 2024–2025 fiscal year, the government has borrowed a total of 64.1 billion pounds, which is around 6 billion pounds more than the Office for Budget Responsibility had predicted when it released its March projection.

For each of the past four months, the deficit figures have exceeded the OBR’s projection.

The Bank of England owns government debt of several hundred billions of pounds. Debt as a percentage of GDP increased to 92%, a record, from 91.6% in July when the BoE was excluded.

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However, even with lower borrowing costs, concerns about affordability persisted. The primary house price balance, which gauges the difference between surveyors’ observations of increases and decreases in home prices, entered positive territory for the first time since October 2022, according to a report released by the Royal Institute of Chartered Surveyors.

Its house price balance increased from -18 in July 2024 to +1 in August, significantly exceeding the Reuters poll’s average economist prediction of -14. Expected sales for the next three months were at their highest level since January 2020—before the COVID-19 pandemic hit the United Kingdom.

Additional markers of the European country’s real estate market suggest that the industry is gaining traction following a recent decline in interest rates.

According to data from mortgage lender Halifax, house prices rose in August at the fastest annual rate since late 2022. However, competitor Nationwide reported that prices fell in August for the first time since April, with a month-over-month decrease of 0.2%.

Chief economist at RICS Simon Rubinsohn stated that there was some doubt regarding the potential for future budget and Bank of England interest rate cuts.

“Affordability remains an issue in the sales market even with somewhat cheaper finance now available but the picture appears even more acute in the lettings market where the amount of rental stock continues to diminish,” he remarked.

In October 2024, British Finance Minister Rachel Reeves will present her tax and spending plan. In September, the Bank of England (BoE), on the other hand, is anticipated to keep interest rates steady, after cutting borrowing costs for the first time last month from a 16-year high of 5.25%.

The general mood and buyer interest have improved, according to RICS’s monthly survey. From +4 in July to +15 last month, its measure of new buyer enquiries reached its highest point since October 2021.

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According to figures released by the Office for National Statistics (ONS), the GDP increased by 0.6% in the first three months of 2024. The rise comes after the decline of 0.1% and 0.3% in the third and fourth quarters of the previous year. Two-quarters of an economic downturn in a row is the standard definition of a recession.

“Widespread growth” in the leading service sector, whose output increased by 0.7% in the quarter after declining toward the 2023 end, was the primary driver of the expansion in early 2024.

The Bank of England now anticipates that the United Kingdom’s GDP will increase by 0.5% this year, double the rate it predicted in February. In contrast, the GDP only increased by 0.1% in 2023. S&P Global’s survey of purchasing managers indicates that in April 2024, the combined output of manufacturing and services saw its biggest increase in nearly a year. Service companies were once again the growth’s main driver.

But the British economy is doing worse than those of its counterparts. The International Monetary Fund revised its prediction of 0.6% to 0.5% economic growth for Britain this year. Germany is the only developed economy with a slower anticipated growth rate than this one, out of the Group of Seven (G7).

Roger Barker, head of strategy at the Institute of Directors, a corporate lobby organisation, said, “Any recovery is still at an early stage and it is likely to be weak, but there are welcome hints of green shoots.”

Election approaching

Nevertheless, Rishi Sunak and his ruling Conservative Party will feel some respite from their severe defeats in last week’s municipal elections, which boded poorly for the party’s prospects in the general election. He faced additional humiliation as one of his legislators joined the opposition Labour Party.
The growth statistics, according to a statement from UK Finance Minister Jeremy Hunt, are “evidence that the economy is returning to full health for the first time since the pandemic.”

However, his Labour Party opponent, Rachel Reeves, stated that British households were still having difficulty despite the GDP growth. In the general election, polls indicate that the Labour Party will easily defeat the Conservatives. According to a YouGov study, 48% of participants said they planned to vote for Labour in the election, compared to 18% for the Conservatives.

Demons called inflation and unemployment

A return to economic expansion could potentially cause mortgage rates to remain high for longer, delaying the widely anticipated interest rate reductions.
Nomura analysts stated that “higher GDP growth enhances the risk of stronger demand pressures on inflation” and the GDP data “casts doubt” on an immediate rate cut. The European country’s annual inflation rate was 3.2% in April 2024, which is a significant decrease from almost 10% approximately a year earlier.

Governor Andrew Bailey stated that the central bank aims for a rate of 2% and anticipates approaching it in the next few months.

“We need more proof that inflation will stay low before we can decrease interest rates,” he said, while keeping the official borrowing costs at 5.25%.

Bailey further said that while a June interest rate cut was not out of the question, it was also not guaranteed and would depend on data on inflation and the job market.

Between January and March 2024, the unemployment rate rose to 4.3%, and the long-term decrease in job opportunities persisted, with 898,000 positions available during the reporting period, down 26,000 from the previous three-month period and, more significantly, down 188,000 from a year earlier. Although the number is still 102,000 higher than it was before the COVID-19 pandemic, that brief period when there was more employment available than unemployed people has long since passed. The most recent total of claims, however, was close to 1.6 million.

Generally speaking, employers want to wait to fire employees until necessary because redundancy programmes are costly, disruptive, and demoralising to the remaining workforce. If you make a mistake, having to locate new acquaintances is equally expensive and inconvenient. This is a case of some postponed effects from the recession that occurred in 2023.

Is the worst yet to come?

The next financial catastrophe is already visible to the Bank of England. It cannot put an end to it on its own. Bank executives worry that uncertainty in a crucial industry that has become more significant and risky in recent years could lead to another financial market collapse, a la, Liz Truss.

Concerns centre on the “nonbank financial intermediation” sector, a broad phrase that encompasses all significant non-bank investors, including hedge funds, pension funds, insurers, and private equity.

Global standard-setters have been struggling to govern this little-understood sector, but many officials feel that Britain needs to act more urgently given that four risky “nonbank” occurrences in as many years have nearly brought down the British economy.

There have previously been warnings from watchdogs in the European Union, the United States, and other countries about the market chaos that could result from a significant collapse in this industry. But because half of the finance for British businesses now comes from nonbanks and financial markets, Threadneedle Street faces an especially urgent issue.

As a result, any crisis or unrest might not only cause issues for the City of London but also directly impact the employment of thousands of individuals.

The Bank of England is unwilling to wait for the next mishap to occur. But since it can’t solve the problem on its own, it is advocating globally for a solution.
Speaking freely under anonymity, an EU source stated, “The UK has been clearly pushing it because of the size of the NBFI [nonbank financial intermediation].”
Before the next round of volatility causes significant economic harm, the Bank hopes that its battle scars will generate impetus for a global crackdown. It has set out on its path to resolve the problems, but in the absence of global unity, it might just amount to a never-ending game of whacking away at the next new issue that arises.

All eyes on BoE

The British central bank has been struggling lately. Reportedly, it had to reduce issues at UK pension funds back to manageable levels after the mini-budget of former Prime Minister Truss unsettled government bond markets.

Threats to the stability of the British financial system included the rush for cash at the beginning of the COVID-19 pandemic, the collapse of the Archegos hedge fund, and the turbulence in the nickel markets following Russia’s annexation of Ukraine.

These days, nonbanks make up half of the financial system, both in the UK and worldwide. In the United Kingdom, financial markets and nonbanks provide half of the capital for enterprises; in the European Union, this percentage is only 27%.

The concern is that this non-banking portion of the financial system has taken on all of the risks since the global financial crisis of 2008. In contrast, banks have been subject to mass regulations over the past 15 years, forcing them to strengthen their resilience after the global financial crisis rocked the underpinnings of the system.

Nonbanks gorged on cheap debt to boost investor returns during the post-crisis decade of low interest rates when copious amounts of money poured around the system. Central bankers worry they are more exposed now that the economic landscape is shifting due to higher rates and tighter money.

The BoE’s lack of knowledge regarding who has overindulged in debt and where is a serious source of concern. Sarah Breeden, deputy governor of the Bank of England, stated at a central bank seminar in February 2024 that “gaps in our knowledge have meant we are mostly creating resilience in market-based finance in response to crises, while we should be aiming to build resilience ahead of vulnerabilities crystallising.”

It is working alone to learn more. Senior BoE officials have issued warnings about the dangers hidden in private equity and private credit, which occur when investors lend money or purchase companies outside of public markets.

It will release more information on the possible threat that private equity poses to stability in June 2024, including an analysis of how prominent the investment giants’ companies are in specific areas of the British economy and whether or not they pose a greater risk than other types of businesses.
The executive director of the Bank of England, Nathanael Benjamin, issued a warning in April 2024 over “the development in sorts and amount of leverage, or ‘leverage on leverage’, throughout the ecosystem.”

Additionally, the bank is conducting the first-ever stress test of its sort to find out how nonbanks would respond to extremely high levels of possible market stress. In 2024, the results may lead to stricter regulations.

However, the UK central bank might be doing nothing since nonbank dangers are intrinsically worldwide. In reality, quick action is required from organisations like the Financial Stability Board (FSB), a worldwide watchdog, or its equivalents.

The core of the global reform agenda is becoming more and more focused on the topic of debt and where it might blow up markets. It might entail a crackdown on how some financial firms leverage borrowing to inflate returns to avert another global financial catastrophe.

Conor MacManus, director of financial services risk and regulation at PwC, stated, “You’d anticipate these to be areas of regulatory scrutiny, given over leverage and illiquidity are often at the heart of most collapses.”

The Financial Stability Board (FSB) will conduct a leverage consultation with a panel co-chaired by UK markets regulator Sarah Pritchard. The goal of the consultation is to address the underlying cause of the problem, rather than addressing it only when a catastrophe occurs.

However, that won’t happen until December 2024 and isn’t going to become official policy for a while, so it lacks the urgency the Bank needs.

There are some supporters of the BoE’s call for action. The European Union will propose certain measures for a broader framework in May 2024. Separately, meanwhile, there is growing disagreement over how far market regulators and central bankers should go.

This division has in the past limited the scope of changes; it was evident once more in the UK when chief markets regulator Nikhil Rathi played down the BoE’s worries about private equity.

The last thing the central bank wants is competition on its soil since development overseas is happening at a glacial pace.

The post As UK escapes recession, what’s next? appeared first on International Finance.

According to the estimates, the BoE will continue to unwind its portfolio of government bonds at the current rate of 100 billion pounds (USD 125 billion) annually.

The QE programme is expected to result in a net loss of 85 billion pounds by 2034, as opposed to an estimate of 80 billion pounds in February 2024, based on the market path for interest rates as of late March.

The loss would be 45 billion pounds, as opposed to the previous estimate of 50 billion pounds, if interest rates were to return to the BoE’s 2018 estimate of the non-inflationary equilibrium rate of around 2%.

“The figure, a small increase on the 80 billion pound in the BOE’s last quarterly report, underscores the burden QE poses for the public finances as losses mount on the £895 billion of asset purchases made between 2009 to 2021 to support the economy through the global financial crisis and pandemic,” commented a Bloomberg report.

“Until late 2022, profits from the programme reduced the Treasury’s budget deficit and helped pay for public services, but high interest rates and asset sales have reversed the effect. The portfolio is being unwound, with 704 billion pound remaining on the books,” it added further.

Why It Matters

Since the British taxpayers are bearing the brunt of losses incurred during the QE programme at a time when government resources are becoming more and more limited, these losses have become a contentious political issue.

Unadjusted for inflation, QE will lose around 20 billion pounds on a yearly basis until the early 2030s, a sum equivalent to a third of today’s British defence budget, the BoE estimated. Under a guarantee provided by the state in 2009, the taxpayer picks up that bill.

Around 48 Conservative Party lawmakers, who control the majority, demanded weeks back that the Treasury look into ways to deduct its own costs from these payments to the Bank of England.

Finance Minister Jeremy Hunt stressed the importance of keeping monetary and fiscal policy decisions apart in a letter to BoE Governor Andrew Bailey.

The QE programme’s profits, which peaked in 2022 at 124 billion pounds, were distributed to the government during the 2010s when interest rates were low.

These financial flows have reverted, with the Rishi Sunak government now covering the BoE’s losses as it pays higher interest on bank reserves it issues for its quantitative easing programme.

The earlier profits are factored into the projected net loss.

The Bank of England’s gilt purchases currently total 704 billion pounds, having peaked at 875 billion pounds following the COVID-19 pandemic.

Between 2009 and late 2022, QE raised 124 billion pounds, which was fully spent. After that, the British government transferred some 50 billion pounds to the BoE to cover its losses with more to come.

Unadjusted for inflation, the net loss over the program’s lifetime is expected to be around 115 billion pounds, the BoE showed. Assuming rates fall back to an “equilibrium” level chosen by the apex bank, the unadjusted lifetime losses are about 65 billion pounds.

On the BoE’s preferred “net present value,” lifetime losses would range between 45-85 billion pounds, it said. Three months ago, the BoE estimated the range at 50 billion pounds to 80 billion pounds.

The figures are likely to change at the next quarterly update as losses are determined by the path of interest rates. Rates are now expected to remain higher for longer, potentially increasing the losses.

Banks Report 135% Income Increase From BoE Reserves

Meanwhile, new data published by the Treasury Committee shows NatWest, Barclays, Lloyds and Santander received over 9 billion pound in interest on Bank of England reserves in 2023, a 135% increase on the previous year.

“Under quantitative easing, the Bank of England created 895 billion pound of new money in the form of central bank reserves held by commercial banks, of which around 700 billion pound remains in circulation. The Bank pays interest on those reserves at Bank Rate, currently 5.25%. This has generated considerable income for banks as a result of the sharp increase in interest rates since 2021. The Treasury is ultimately liable for these payments as it indemnifies the QE programme,” the committee remarked further.

“During the Treasury Committee enquiry into the Bank’s quantitative tightening programme, some evidence submitted to MPs suggested changing the rules on how bank reserves generate interest in order to reduce the amount paid out by the Bank of England. MPs on the cross-party Committee concluded they did not support this measure as they believe taxes on banks should be set through Parliament in a Finance Bill,” it added further.

During the Treasury Committee’s fact-finding stage, bank bosses listed out the steps they’ve taken to pass through better savings rates for customers. The listed measures include a significant uptick in the amount NatWest and Santander are paying customers in interest.

The communications from the banks also contain data on the lenders’ mortgage repossession rates and their criteria for closing branches.

The Treasury Committee has concluded gathering evidence as part of its enquiry into whether small and medium-sized businesses (SMEs) have adequate access to financing. The report will likely be published this year.

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The cheer is not an unfounded one as food prices showed a decline in March 2024, which further caused the overall inflation to reach its lowest point in 2.5 years. According to the Office for National Statistics (ONS), consumer prices in the United Kingdom increased by 3.2% in the year that ended in March, the smallest increase since September 2021, after declining by 3.4% in the previous two months.

The United Kingdom’s March inflation report confirmed investor confidence that the BoE’s policymakers, under Governor Andrew Bailey’s direction, will choose to reduce interest rates early in 2024 to accelerate economic development. Analysts noted that although UK inflation remains higher than the BoE’s 2%, the trend is downward.

The United Kingdom has raised expectations for a rate cut. Fed Chair Jerome Powell issued a warning last week about the possibility that interest rates in the largest economy in the world may remain elevated for some time due to an unexpected increase in price pressures in the US.

Worry Still Lingers

As per the International Monetary Fund (IMF), UK GDP will grow by just 0.5% in 2024. However, with falling inflation and predicted interest rate cuts, it looks like the Rishi Sunak government may be taking the British economy out of the woods to some extent.

However, the projected growth figures are not that encouraging, as IMF sees the ratio to stay around 0.1% points for 2024 and 0.5% and 1.5% in 2025. IMF also sees the calculated per head GDP, which measures the monetary value of goods and services produced within Britain, will flatline in 2024.

However, with inflation also falling faster than previously expected and interest rate cuts on the way, the overall economy may be in a healthier shape by the 2024 end. Not a bad turnaround, because the European country went into recession at the end of 2023. IMF sees the UK economy to outmuscle Germany, France and Italy from 2025 onwards. IMF also sees the Bank of England lowering interest rates from the current headline rate of 5.25% and providing much-needed relief to homeowners facing sharp rises in mortgage rates.

A sharp downturn in inflation and interest rates is made possible by what the IMF says has been a ‘rapid fading’ of the price shocks caused by Russia’s war on Ukraine. However, the British economy is still facing headwinds like persistently slow economic growth, high public debt and little room to increase government spending.

UK Inflation: Essential Measures

Core inflation, which does not include energy, food, drink, or tobacco, decreased to 4.2% last month from 4.5% in the previous month, which was also more than economists had predicted. In the meantime, the BoE’s indicator of domestically generated pricing pressures, the services sector’s inflation, dropped from 6.1% to 6%. Economists and the BOE had projected a decline of 5.8%.

UK traders dramatically reduced their bets on the BoE cutting interest rates, shifting their preferences to only one quarter-point cut this year. Following the announcement of the UK inflation figures earlier today, sterling climbed against the euro and touched a new one-month high against the declining dollar.

Following the release of the data, the pound saw a 0.4% increase to USD 1.2479, ending a three-day losing streak. In one of the most policy-sensitive bond markets, the yield on two-year gilts, increased by as much as six basis points to 4.53%, the highest level since February. The end of 2022 saw a high of almost 11% for UK consumer price index-based inflation due to the Russian invasion of Ukraine, which sharply increased energy prices.

Will UK announce rate decreases before the US?

For the first time in the past two years, the UK’s inflation rate is lower than the US’s. The US saw an increase in inflation to 3.5% in March. BoE Governor Andrew Bailey noted that the inflation dynamics in the two economies are different and suggested that the UK would be able to cut interest rates before the US.

Andrew Bailey said that due to the latest robust US price data rattling markets, there is more demand-driven inflation pressure in the US than there is in the UK. He observed strong evidence of a reduction in price pressures in the UK.

According to his comments, Andrew Bailey doesn’t think there’s much chance that the UK will have upward inflation, as it happened in the US in March.

In stark contrast to Andrew Bailey’s remarks, Fed Chair Jerome Powell stated that new inflation statistics suggested it would take more time for US officials to feel confident enough to cut interest rates.

Economists predict that UK inflation will drop even further in April 2024, probably to less than 2%, as a result of much lower domestic energy costs. This could lead BoE policymakers to contemplate lowering interest rates in the coming months.

According to reports, analysts anticipate decreases from the BoE of 41 basis points (bps) in 2024. Global inflation has decreased in part because higher interest rates make borrowing more expensive, which cools the economy and reduces expenditure.

Here’s How Rate Reductions Will Help Households

Experts cautioned against the BoE using a lower-than-anticipated decline in inflation in March as justification for delaying future interest rate reductions. BoE decision-makers must remain composed and take initiative. Analysts believe that the central bank should take swift, clear action this summer.

“We hope that excessively cautious authorities won’t use this as just another excuse to further postpone rate cuts, even though the last stretch to meeting the BoE’s 2% target is harder and slower. Starting in June, they have to start lowering the historically high rate of 5.25%. No ifs, no buts,” declared deVere Group CEO Nigel Green.

“It (BoE) cannot fail now with its dedication to a restrictive monetary policy, which is making matters worse for consumers and businesses throughout the United Kingdom,” Green stated.

A rate reduction will have a large positive impact on households because lower mortgage rates result in lower monthly payments, which free up extra cash for savings and spending. Reduced financing costs increase the accessibility of homeownership for prospective purchasers, hence boosting demand for homes.

The analyst continued, “A rate drop would boost consumer confidence and expenditure, pushing economic development from the ground up by relieving financial burdens on people.”

The Discussion In America

President of the Federal Reserve Bank of Atlanta Raphael Bostic stated that he was satisfied with maintaining current interest rates and reiterated that he believes lowering borrowing costs won’t be acceptable until close to the 2024 end.

Bostic stated that although he still thinks inflation will reach the central bank’s 2% target, it would probably do it more slowly than most people anticipate. The head of the Atlanta Fed has already stated that he expects this year to see just one rate drop.

Bostic, who will vote on monetary policy this year, stated he will keep an eye on inflation-adjusted wage increases and employment creation.

“At the moment, our current stance—which I believe is restrictive—will slow down the economy and finally get us down to 2%. However, if all these other wonderful things are occurring, I’m not in a crazy rush to get there,” the official commented further.

After inflation showed itself to be obstinate in the first three months of the year, policymakers are prepared to maintain interest rates at their present, two-decade high. Fed Chair Jerome Powell stated that sustained inflation indicates it will probably take longer than anticipated to build sufficient confidence to reduce borrowing prices.

Traders now anticipate one or two rate reductions this year. That is a long cry from the three that Fed officials penciled in just a month ago, and the roughly six that they anticipated at the beginning of 2024.

The post If Insights: Will UK cut its interest rate ahead of US? appeared first on International Finance.

The British central bank’s Monetary Policy Committee (MPC) voted 6-3 in favour of keeping the rate at 5.25%, the highest level in more than 15 years.

While the United States Federal Reserve had also frozen its borrowing costs, it gave a different picture than its British counterpart, by suggesting that the American economy might witness an ‘Interest Rate Relief’ from 2024 onwards.

“Monetary policy would need to be sufficiently restrictive for sufficiently long to return inflation to the 2 per cent target sustainably in the medium term,” The Bank of England stated further, while adding, “The committee continued to judge that monetary policy was likely to need to be restrictive for an extended period of time.”

While the United Kingdom inflation dropped sharply in October 2023 to 4.6%, but the ratio remains at its highest level, compared to its G7 (Group of Seven) peers. Bank of England wants to keep inflation at a 2% rate.

However, there is another worry in the form of the latest GDP data, which shows that the European economic powerhouse contracted by 0.3%. This data alone intensifies the recession risk.

While it was the first time since July 2023 that the British GDP growth slowed down on a month-by-month basis, the Sterling fell against the United States Dollar and was weaker against the euro too.

Governor Andrew Bailey, in his recent letter to finance minister Jeremy Hunt, said that there was “still some way to go” in policymakers’ efforts to drag inflation down.

Inflation surged to a 41-year peak at 11.1% in October 2022, stoked by spiking energy prices after the beginning of the Ukraine war. While the West (including the UK and Europe) decided to punish Russia economically due to its military campaign against its neighbour, the Kremlin countered it by diverting much of its global energy supplies to markets like Asia, whereas Britain underwent a cost-of-living crisis.

Coming back to the latest Bank of England meeting, six Monetary Policy Committee members voted in favour of no change, but three others called for an increase to 5.5% and cited “evidence of persistent inflationary pressures”.

The Bank of England also froze borrowing costs at its previous gatherings in September and November 2023, thereby snapping a series of 14 rate hikes.

Sectors like construction, manufacturing and services are now slowing down in the United Kingdom. The overall economy also flatlined in the three months to October 2023, while the other British government data shows that the unemployment steadies and wage growth retreats around the same point in time.

Hunt has also maintained a stance about the Bank of England rate hikes impacting economic activities.

Bank of England, on the other hand, has stated that despite its multiple rate-hikes prolonging a cost-of-living squeeze, retail banks are well equipped to contain the fallout.

These banks pass on Bank of England rate hikes, affecting customers whose home loans come with variable interest rates, as well as those, whose fixed-term mortgage deals are expiring.

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