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In the News

Why Table Mountain holds a clue for the path of UK interest rates

Geoff Riley

22nd September 2023

Table Mountain is an iconic flat-topped mountain located in Cape Town. At the summit of Table Mountain, you'll find a large, nearly level plateau that stretches for approximately 3 kilometers (about 1.9 miles) from end to end. And this iconic landmark in South Africa may give a clue as to prospects for UK interest rates over the coming months.

After fourteen successive interest rate rises stretching over two years, yesterday the Bank of England announced a pause in their tightening of monetary policy. Bank rate stays at 5.25% providing small relief to highly leveraged mortgage-holders and many companies who were braced for one more nudge higher in their borrowing costs.

There is an interesting debate to be had over whether UK policy interest rates have now peaked in the current cycle. This week's welcome and slightly unexpected small fall in inflation was perhaps the catalyst for the 5-4 MPC vote to keep rates on hold.

But with core inflation and wage inflation remaining strong, we shouldn't expect the central bank - charged with the task of getting inflation back down to the 2% target - to start moving interest rates lower any time soon. And this is were Table Mountain comes into view.

Speaking at a conference in South Africa last month, the Bank of England's Chief Economist Huw Pill said that he preferred the path of UK interest rates to resemble the Table Mountain route. rather than the Matterhorn! This approach would involve a lower interest rate peak but then stay at a high altitude and follow a flat plateau for a considerable period.

Table Mountain, Cape Town, South Africa

This path for interest rates carries significance. It means that we have and perhaps are still transitioning to a new normal for borrowing costs and (hopefully) returns for savers.

After a decade or more of ultra-low policy interest rates in many advanced countries, we have moved into a phase where nominal interest rates will be in the 4-6% range. And this will require adjustment by all economic agents. Savers will generally benefit. Those with spare cash may well have spent some time in recent months searching for and finding more competitive returns for their savings - there has been a marked rise in interest rates on one and two-year growth bonds and ISA accounts for example.

For businesses, companies that rely on debt financing will have seen an increase in their borrowing costs, potentially impacting their profitability. The cost of capital for investments may rise, which could lead to decreased planned business investment. Cash-flow become vital when money is more expensive to borrow.

A return to higher interest rates is also impacting on the housing market. Mortgage interest servicing costs have climbed steeply and one effect has been a sharp rise in the number of landlords with buy-to-let properties trying to cut their debts by selling some houses in their portfolio. This trend is further exacerbating the shortage of rental properties and potentially raising costs for tenants notably among students arriving at universities with chronic and deepening shortages of affordable rooms.

My point is that debates over the next nudge higher or lower in interest rates can hide a more salient point. Advanced economies such as the UK must now adjust to levels of interest rates that were common-place 15-to-20 years ago. And this will make the macroeconomics of the UK economy really interesting as we head into 2024.

Further reading:

Phillip Inman on today's interest rate decision: he argues that it signals the end of interest rate hikes because of the current state of the UK. He's of the view that upcoming economic data, reflected in the MPC Report which notes a weakening housing market, and suggests that wage growth has been overstated, is likely to indicate that further rate rises would damage the economy.

Judging by the state of the UK economy, the Bank is done with interest rate hikes

Further reading:

The Federal Reserve in the United States has stayed its hand on another interest rate rise, leaving rates at 5.25% - 5.5%, but some of the rhetoric associated with this is fascinating, noting the change in tenor of policy moving away from a sole focus on inflation to ensuring that monetary policy doesn't 'damage' the economy.

Fed holds interest rates steady - for now

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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