Welcome to our August edition of ‘Insight’ by Insignis. Each month, we discuss a topic of interest within the UK financial sector. This month we are discussing the UK Economy and its positioning for growth following the pandemic.
It seems inconceivable in the current environment that 2021 kicked off with a third lockdown, a sluggish vaccine programme and the base rate remaining at an all-time low of 0.10% with Banks warning of the potential for negative rates later in the year.
Below target inflation was causing concerns that spending may be put off, with Consumer Price Inflation reaching just 0.7% in February 2021, well below the Bank of England’s 2% target. Meanwhile, the effects of the third lockdown continued to restrict the economy, with 4.9m employees furloughed by the end of January and UK GDP estimated to have decreased by 1.5% in Q1 2021.
Deposit rates were also subdued following a robust end to 2020, with the NS&I enforcing large rate reprices. In-fact, the early part of 2021 was largely impaired by interest rate reductions with leading instant access and 1-year rates falling as low as 0.37% and 0.63% respectively in reflection of the continued high levels of liquidity.
As the roadmap out of lockdown kicked off, albeit with a few delays along the way, the economy quickly regained strength with UK GDP estimated to have increased by 4.8% in Q2 2021. The EUROs provided a much needed boost, both for morale and the service economy, and the Stamp Duty Holiday led to a surge in the property market. According to Rightmove, 1.3 million buyers benefited from the stamp duty relief scheme, representing the busiest property market in the past 10 years, and a significant backlog of sales remains in the pipeline.
The increase in economic activity, and particularly the booming property market, has led to an increase in appetite for deposits from banks to fund record levels of lending. Deposit rates significantly rose in Q2 with June seeing 1 year products pay 1% for the first time since November last year. Fueled by a buoyant challenger bank market, rates have continued to rise with leading instant access rates reaching 0.55% by July 2021.
Although these deposit rates might still be historically low, they remain 5-10x the Bank of England base rate and can provide a welcome boost to income for individuals, corporates, and charities who have cash reserves to put to use.
Recent economic data alludes to an upbeat picture. The British Chamber of Commerce predicts UK GDP growth for 2021 to be 6.8%, which would equate to the strongest outturn since records began.
CPI Inflation saw a sharp rise to 2.4% in June and despite a reduction to 2.1% in July, economists forecast that inflation will head over 3% in the Autumn, significantly above the BoE’s target level. However, the MPC expect such rises to be transitionary and have stated that the BoE does not intend to tighten monetary policy “at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”. On the other side of the scale, it remains a possibility that the BoE could enforce a negative rate on the rate it pays Bank Reserves to maintain the current lending splurge. This could reduce bank liquidity and push further rates increases across the banking sphere.
The Insignis platform can help busy financial advisors and treasurers to take advantage of recent interest rate increases without the hassle of onboarding or managing multiple bank relationships.
Through one single sign-up, you can diversify deposits across several counterparties to reduce single counterparty exposure. Our platform also enables you to view and report upon all of your cash holdings in one place and should further rate increases come to fruition, you will be in a position to exploit the deposit accounts from any one of the 33 banks and building societies on our panel.
If you would like to discuss any aspect of this ‘Insight’ in more detail, then please get in touch with us at email@example.com.