The Organisation for Economic Cooperation and Development (OECD) has sharply upgraded its predictions for UK economic growth this year and in 2025 after previously predicting that the UK would have the weakest growth of any G7 country. The OECD has forecast that the UK economy will grow by 1.1% in 2024 and by 1.2% in 2025, up from previous forecasts of 0.4% and 1.0% respectively, and similar to the Bank of England (BoE) forecasts of last month. However, the OECD continues to predict that the UK will have the highest inflation of any G7 country in 2024 and 2025 at an average of 2.7% in 2024 and 2.4% in 2025, little changed from its previous forecast.
The Monetary Policy Committee (MPC) of the Bank of England (BoE) has kept interest rates at 5.0% at its September meeting, saying it would be careful about future cuts, and also held off from running down its bond holdings at a faster pace, avoiding extra budget strains for Chancellor, Rachel Reeves. Economists polled by Reuters had forecast a 7-2 vote for a hold after last month’s tight 5-4 decision to cut rates from their previous 16-year high. After the announcement, investors have no longer fully-priced-in two interest rate cuts by the end of 2024 but expect the BoE to cut interest rates in quarter-point steps four or five more times by June 2025.
The Financial Conduct Authority (FCA) has found that UK’s largest banks are paying below-average interest rates for some savings accounts and has warned that the banks will face regulatory action if they fail to offer better value. Under the FCA’s Consumer Duty – which came into force last July – banks, asset managers and other regulated financial services companies have to ensure customers receive fair value and that no group is receiving a worse deal than others on the same product.
Analysts believe that revised UK bank regulatory capital rules will boost the ability of UK ‘challenger’ banks to compete with the larger banks by offering more competitive rates in the £1.7 trillion UK mortgage market. The Bank of England (BoE) has said that it intends to lighten capital reforms on UK banks in a revised interpretation of global rules (known as Basel III). The package is expected to boost competition among UK banks by also broadening access to the more favourable IRB approach and by giving small domestic deposit takers interim relief from the new rules. The six largest lenders are estimated to have a market share of 71.6% of all mortgages in the UK at end-2023.
The new Labour government – whose first budget Chancellor, Rachel Reeves, will deliver on the 30th October – is on the lookout for “broad shoulders” to help plug an alleged £22.0 billion fiscal “black hole”. Analysts believe that Ms. Reeves might target the big four UK lending groups (Barclays, HSBC, Lloyds and NatWest) since high central-bank interest rates have turbo-charged their income, while the banks have passed on relatively little of the income boost to their customers in the form of higher deposit rates.
Close Brothers Group has agreed to sell its wealth management unit to private equity firm, Oaktree Capital Management, for up to £200 million. The decision resulted from a strategic review aimed at fortifying its balance sheet as it braces for a possible hit from a regulatory clampdown on its motor finance business.
The Italian bank, UniCredit S.p.A., has approached the German bank, Commerzbank AG, about exploring merger talks after Italy’s second-largest bank bought a 9% stake in the German lender and signalled it was open to buying more which has reignited speculation of consolidation in Europe’s fragmented bank sector.
During the month, Moody’s raised the long-term credit ratings for Clydesdale Bank plc and its Parent (Virgin Money UK PLC) by 2 notches with “Stable” outlooks following the announcement confirming that the Financial Conduct Authority (FCA) and the Bank of England’s Prudential Regulation Authority (PRA) have approved their acquisition by Nationwide Building Society. Moody’s also raised the outlook for Standard Chartered Bank and its Parent (Standard Chartered plc) to “Positive” to reflect the improving profitability driven by income growth from Global Markets and Wealth/Retail Banking while the agency expects the Group to maintain stable asset quality, capitalisation and liquidity. Meanwhile S&P raised the outlook for Swedbank AB to “Positive” to reflect the agency view that progress has been made to remediate anti-money-laundering and corporate governance shortcomings while the impact of the pending investigations is expected to remain contained.