Reading the leaves

You don't need me to tell you that recent years in the commercial finance sector have been marked by a series of global events that have significantly impacted the market.

As commercial finance brokers, we have all observed these changes closely, and I am sure that like me, you too have noted how they've influenced both lender and borrower behaviours and the cost of funds - the fundamental product of our industry.

Current forecasts suggest that UK interest rates might peak between 5.75% and 6% by early 2024. However, given the ceaseless unpredictability of recent events, this outlook remains uncertain.

Since December 2021, the Bank of England has raised rates 14 times in a row in an attempt to bring inflation closer to its 2% target. These efforts, however, have been continually challenged by both foreseen and unforeseen global occurrences, which have combined to destabilise the UK market. This situation leads to the question of whether we are nearing the peak of this rate-rising cycle.

The signal and the noise

Looking ahead, expectations indicate that UK interest rates might not fall until mid-2024, potentially plateauing at around 4.5% by 2026. These predictions, based on current data, could well change rapidly, as seen in the past few years. The approach of using interest rate hikes to control inflation seems somewhat outdated in a market heavily influenced by global factors.

In the period from April to June 2023, the annual growth for regular pay, excluding bonuses, was 7.8%, the highest since records began in 2001. This trend suggests that wages are outpacing core inflation, which is positive for the economy as it implies increased consumer spending power. However, this scenario is somewhat complicated by the fact that inflation remains stubbornly high.

For example, the Core Consumer Price Index, which excludes energy, food, alcohol, and tobacco, rose by 6.1% in the 12 months to September 2023. This increase indicates that higher wages could lead to greater spending, potentially driving up inflation further. If viewed simplistically, one might conclude that we are not yet through with interest rate increases, especially considering the Bank of England's ambition to maintain a 2% inflation rate.

Market response

Mortgage data, coupled with the effects of 14 consecutive rate increases, suggests there's a lag in the market's response, indicating a potential downturn in retail sales. The data seems to be pointing in different directions for now, but the expected impact of the rate-rising cycle could lead to a "recession" on the high street, despite the data on wage inflation. This situation remains speculative, and certainty will only come with time.

In the mortgage market, the pressures are particularly evident. Rates have increased almost fourfold, with people refinancing 1.5% fixed rates at around 6%. The additional wages people are earning are largely being absorbed by these higher mortgage costs, further exacerbated by the current cost-of-living pressures. Though economic theory might suggest that rates should continue to increase to control inflation, the reality on the ground, as observed from my position in the industry, suggests that a more cautious, wait-and-see approach is warranted over the next six months.

Beyond mortgages, the impact on the broader funding market is significant. Many development schemes have become economically unviable due to inflated land prices and increased finance and material costs. This shift is causing uncertainty throughout the finance market, affecting the attitudes and strategies of both lenders and borrowers.

Bridging finance has emerged as a popular temporary solution, but it may only delay addressing the underlying market issues.

The broker's vantage point

From my perspective as a commercial finance broker, I see these market fluctuations firsthand. The insights gained from both lenders and borrowers indicate a market in transition, grappling with the effects of the rate increases. The uncertainty in the market is palpable, and it's clear that a new cycle of adjustment is underway. We know the market will eventually stabilise in this new landscape, but the question remains: how much more volatility can it withstand?

Whilst it appears we may be approaching the end of the current cycle of rate increases, the market's ability to adapt to further unforeseen events will be crucial. As an intermediary, my observations of lender and borrower attitudes suggest a market on the cusp of change, seeking a new balance between controlling inflation and supporting economic growth.

The market's resilience in adapting to new conditions will be key in determining the future landscape of commercial finance. The insights gathered from both lenders and borrowers suggest a cautious approach to the current situation, with the market awaiting a new equilibrium between inflation control and economic support. And in the interim?

We sit tight and continue to proudly and professionally serve our clients, just like we always have.

Read the full magazine; https://nacfb.org/magazine/november-december-2023/