The Current Account: The Latest Headlines From Across The Banking Sector - January

Welcome to our first edition of The Current Account for 2023! We hope you enjoy our latest round-up of the top news from the industry in December.

Headlines from the banking sector this month.

In this edition of The Current Account, we discuss if interest rate rises are coming to an end and the impact that the Big Bang 2.0 proposals are likely to have on the sector this year

Interest rate rises….is the end in sight?

• On 15 December 2022, the Bank of England raised the base rate by 0.5% to 3.5%, the ninth increase since 2021. The BoE's Monetary Policy Committee voted 6-3 to raise the rate in a bid to lower the inflation rates, which hit a 41-year high in October 2022. The next interest rate decision is on Thursday 2 February 2023 where further hikes are expected
• However, some economists are predicting that the BoE could end its programme of rate rises this quarter
• The increase in the base rate seems to be having the desired effect with the top companies in the UK taking on less debt than before, resulting from the increased cost of credit along with tougher lending requirements
• Huw Pill, the chief economist of the Bank of England recently gave a speech on the outlook of the UK monetary policy. He outlined that the UK economy is facing several challenges at the same time and the steps that the Monetary Policy Committee are taking to bring inflation back down in the near future. Experts are forecasting a fall in inflation this year, dependent on factors such as China’s covid policy and the war in Ukraine

PEN Point Of View:

Jerome Powell and the Fed have been accused of being behind the curve and he himself said that rates would be higher for longer. We’re not in the business of predicting rates; however, our sense is that whilst inflationary pressures are easing, the BoE is further behind than the Fed and the UK is more exposed to shocks such as from Ukraine, the oil price etc. Thinking back to the mid-90s, it wouldn’t be the first time that the market predicts the top of the curve before inflation is fully under control.

Not so Big Bang 2.0

• Early in December, the PM announced the Edinburgh reforms (Big Bang 2.0) in an effort to make the UK more competitive
• The reforms highlight plans for a UK financial services sector that is open, sustainable, and technologically advanced
• Planned reforms that were unveiled include EU regulations such as MiFID II and Solvency II to be repealed and replaced with a new framework tailored to the UK
• While a number of City heads have backed the reforms, many believe they are not significant enough to yield a second “big bang” for the City
• Specifically, there are concerns that some elements, such as plans to roll back the ring-fencing regime, and the Governor of the BoE warning against ripping up the rulebook
• Whilst it looks to be an extensive package of reform, many of the proposals are not yet concrete, so expect to see a number of consultations in 2023

PEN Point Of View:

London’s financial reputation has taken a hit since Brexit, and the Edinburgh Reforms represent the most significant regulatory change since leaving the EU, encouraging investment and growth. With a majority of the packages proposed still to be worked through, don’t expect it to have significant implications for the sector in 2023 - really it has bought the Chancellor time to review a number of reforms, and will take a while to drip through.

And in case you missed it…

• The largest banking providers in the UK have now fully implemented the standards required by the CMA to deliver Open Banking
• The Open Banking Implementation Entity (OBIE) will transition to a new open banking entity this year, with plans recently being unveiled
• The European Central Bank will finalise the overall design of a digital euro in the second half of this year

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