In Focus Risk


Portfolio management through the economic cycle


After the first base-rate rise in several years, how will the industry, and wider economy, react?


Venkat Srinivasan Head of lending, Monzo Bank venkat@monzo.com


The Monetary Policy Committee (MPC) on 2 November voted by seven to two to increase the base rate from 0.25% to 0.5% – this is the first increase since 2007. Borrowing will become more expensive leading to a higher debt-servicing cost. Mark Carney, governor of the Bank of


England (BoE), said: “With unemployment at a 42-year low, inflation running above target and growth just above its new, lower speed limit, the time has come to ease our foot off the accelerator. That will help bring inflation back toward its 2% target, while still supporting jobs and growth.”


Unemployment The unemployment rate was at 4.3% in the three months to August, unchanged from the previous reading. It is at the lowest level since 1975. However, the UK has one of the highest inflation rates among the world’s top economies. Our reliance on imports, which have become costlier since the Brexit vote, sparked Sterling’s devaluation. We are already observing lower levels of


unemployment, low wage growth, and high inflation. This means ‘lower job losses’ while disposable income is being squeezed by rising prices (inflation) without an equivalent rise in income.


Impact on arrears We are now witnessing a rapid growth in borrowing on credit cards, car finance, and personal loans. Consumer spending is backed by the availability of cheaper credit and it is


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may not become any cheaper in the short run as it is driven by the depreciation). If they are employed in the gig economy


The rise in interest rate may also see the much talked about increase in productivity. Labour- intensive industries may adopt automation and it might be the best alternative for many industries as they face the uncertainty of Brexit


(a labour market characterised by the prevalence of short-term contracts or freelance work, as opposed to permanent jobs) they may even face a lower income for discretionary expenditure. For example, demand for services like Uber or Deliveroo may see a fall. Arrears in lower income and highly


indebted customers are likely to increase. The growth in self-employment has helped


likely that costlier credit may curb some of this spending: hence inflation. The BoE is looking to stem the tide of rising inflation (target 2%) by raising the interest rate. Costlier credit will impact the highly


indebted customers. This is likely to impact in two ways – those on a higher income (but with bigger debts) are likely to rearrange their budget and possibly curb their discretionary expenditure. The lower income (and indebted)


customers may face two challenges as they may not be able to rearrange their finances for essential expenditure like food (which


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to sustain lower levels of unemployment, however, costlier capital may see lower demand and a fall in wages. This may not be restricted to those employed in the gig economy alone, self-employed professionals, such as interims, consultants, or project managers, who support businesses on an as-needed, non-permanent basis may see a fall in income. The rise in interest rate may also see the


much talked about increase in productivity. Labour-intensive industries may adopt automation and it might be the best alternative for many industries as they face the uncertainty of Brexit.


Credit strategies So what does this mean for credit strategies? Credit strategies are rules that determine ‘to whom to lend’ thus managing credit exposure for a lending institution to segments, in accordance with their target market, product, and risk appetite.


January 2018


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