Market Loop - 📊Interest rates stay put…for now

ECONOMY
Interest rates stay put…for now 

What’s going on?
The Bank of England surprised the market yesterday when it announced it would not raise interest rates from the record low of 0.1%. But the UK central bank did drop hints that an increase is on the way within months.

Why is this important?

The Bank of England’s main role is to use interest rates to keep inflation below 2%.

Thursday’s statement from the Bank’s policymaking committee was hotly anticipated by investors and economists. The market had expected that rate rise would be on the cards to cool the rapidly rising prices of goods and services.

But the Bank’s nine policymakers voted 7-2 to keep rates unchanged. Inflation is currently 3.1% but is predicted to reach 5% by next year – the highest in a decade. 

The wait was justified by concern about economic growth following signs of weakening consumption due to higher energy prices and clogged up supply chains. 

But Bank officials said recent economic data reinforced the view that borrowing costs will have to rise in the “coming months” to keep inflation on target.

Takeaway
The decision to keep interest rates unchanged caught many by surprise and led to a fall in the value of the pound by two cents against the US dollar to less than $1.35. 

The Bank believes that the UK economy is still too fragile to deal with higher costs of borrowing despite the rising inflation.

Policymakers meet every six weeks so there’s a chance a pre-Christmas rise could be in store. But the Bank made it clear that interest rates were not going to return to levels seen before the 2008 financial crisis, i.e. above 5%, anytime soon.

BANKS
Metro Bank attracts US takeover bid

Shares in Metro Bank rose by nearly 30% yesterday after it confirmed it received a takeover offer from Carlyle, an American private equity firm.

Metro was founded in 2010 and is the newest UK high street bank in over 150 years. Today it has 78 branches and more than two million customer. The bank tries to stand out from its more traditional rivals with branches that are dog friendly and open seven days a week.

However Metro has struggled since launch, its smaller scale and intense competition has made the past decade of low interest rates a challenge for profitability.

On top of that a major accounting error in 2019 led to an overhaul in its leadership. Since then the share price has tumbled but the approach from Carlyle led to its best ever one-day performance.

This year has been one of the busiest ever for UK takeovers by private equity firms. The deep pockets of private equity firms combined with the relatively low valuations of British businesses versus America and European peers has fuelled the activity.

The banking sector could see particular attention driven by hopes that rising interest rates might boost the profits of smaller banks like Metro which have struggled to compete against the high street giants.