CFI: News Review
It’s not a question of if, it’s when rates go up But not everyone agrees
by Rob Lankey, head of lending, Aldermore Commercial Mortgages
at the time of writing this article, economic forecast- ers and city analysts have clashed horns over the hot topic of the possibility of an imminent rise in interest rates. many city analysts are
expecting to see rates rise sooner than previously expected - possibly by June of this year. their expecta- tion has been heightened by the publication of new figures by the office for national Statistics which show that factory gate prices have increased more than anticipated, because of a sudden rise in global commodity prices for items such as wheat, metal, oil and chemicals. the gilts market reacted to this news with bond yields rising to a 12-month high, which many city analysts have inter- preted as the market pricing in an interest rate increase.
Inflation inflation has remained stub- bornly high and increases in Vat and petrol prices mean that it will continue to rise in the short-term. the economic consultants cebr have forecast that inflation will peak at 4% over the next 3 months, before falling back to 2.6% toward the end of this year and then 1.6% by mid 2012. High inflation has been one of the key factors fuelling calls for an increase in Bank Base rate.
with the need for higher rates. the ernst & Young item club, an influential forecasting group, has said that the Bank of england should ”hold its nerve” and not be spooked by a short- term spike in inflation. its view is that higher inter- est rates could endanger an economic recovery. it also says that a rate rise now fol- lowed by a dip in the econo- my could result in inflation falling below its target level, with interest rates having to be cut once again, which would damage the Bank of england’s credibility.
Fear there is fear that if the Bank of england raises rates too quickly it will choke off a re- covery. if, on the other hand, it does nothing, then infla- tion could continue to rise to dangerously high levels, which will hit consumers hard. i’m glad it’s not me who has to make such deci- sions!
Vested interest as the managing director of a commercial mortgage lending business, i obvious- ly have a vested interest in seeing interest rates remain low. anything which makes life tougher for borrowers, especially amongst small and medium sized enterpris- es (Smes), has to be viewed as a backward step and my instinct is that we need to give the recovery time to really take hold be- fore throwing further chal- lenges, such as higher inter- est rates, in front of business owners.
46 mortgage introducer FEBRUARY 2011
EFG fails to deliver where it’s needed most
It seems strange, having just said how important it is to help small businesses by giving them access to low- cost funds, to hear that the volume of lending under the Government’s Enterprise Finance Guarantee (EFG) scheme, has fallen a further 5% in the last quarter. Lending to SMEs under the EFG scheme dropped from £149 million in the second quarter of 2010, to £141 million in quarter three. Lending under the EFG scheme has now fallen by 35% in the last year, from £217 million in quarter three 2009.
A further worrying aspect of the scheme is that it is failing to get funding to SMEs in those regions of the UK that are most exposed to public sector spending cuts. For example, during the third quarter of 2010 the amount of funding received by Northern Ireland SMEs fell by 56% from £3.2 million to £1.4 million. The North East saw a fall of 17% from £6.7 million to £5.6 million and funding to Welsh SMEs dropped 12% from £6.3 million to £5.5 million. These declining figures need to be considered alongside data from the Office for National Statistics, which confirms that the public sector in the North
East accounts for 32.2% of the total workforce, in Wales that figure is 32.9% and in Northern Ireland 30.8% of the total workforce is employed by the public sector. These figures are significantly higher than the UK average of 19.5%. It’s a real concern that some of the regional economies that are suffering the greatest falls in government-backed business funding, are also those areas with a high reliance on public sector jobs. On the face of it, the EFG is an excellent scheme and great way to make funding available to SMEs, so any decrease in its uptake has to be seen as a retrograde step. To compound the
problem, the Government has recently announced changes to the EFG scheme that may have made it less attractive to bigger banks. The Government’s guarantee of lending under the EFG is capped at 9.75% of total funds lent out by each bank. The cap on the guarantee is set to be reduced even further to 9.225% (from April 1 2011). Rather than reducing the EFG guarantee for lenders, increasing the guarantee would be one way for the Government to encourage banks to lend more to small businesses. If the Government were willing to underwrite a larger proportion of the EFG loans, then more loans might be written.
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