Taking a look at the UK’s economic situation now

Looking ahead 

Following on from our feature from April, here we provide an update on our thoughts on the economic situation and what might come next.

What’s the economic situation right now? 

Mercifully, July saw a sharp drop in inflation, with consumer prices 6.8 per cent higher in July than a year earlier, falling from an annual increase of 7.9 per cent in June. This was the lowest inflation rate since February last year, and was driven by falling energy prices.

While falling energy prices are definitely positive for businesses, rising costs continue to be a problem for many. Wage pressures in particular remain significant (between April and June the annual growth rate in wages was the highest it’s been since comparable records began in 2001). 

Inflation therefore continues to be a concern for the Bank of England who have been increasing their base interest rate (currently at 5.25%), which effectively makes it more expensive for people to borrow money and leads them to save instead. This in turn creates less demand for goods, and therefore lowers inflation. But what is next for interest rates?

Interest rate markets are currently pricing in a further 50-75bps of increase in interest rates this year before gradually reducing to 4.5% by mid-2026. However, in a recent speech Huw Pill, the Bank of England’s Chief Economist, suggested that this may not be sufficient and instead interest rates may need to be kept at their current levels until 2026 to keep inflation under control.

How does all this affect pricing?

As we explained in detail in our November newsletter, the cost of Funding Circle loans are determined by future expectations of interest rates, or more specifically SONIA (Sterling Overnight Index Average) swap rates. This means that when inflation fell sharply and expectations for future interest rate rises dropped, we were able to reduce our pricing.

However, as outlined above it’s very difficult to predict the future and say where prices will go next. We therefore remain committed to saying yes to more borrowers and helping your clients get the funding they need to thrive.

If you have any questions about this your BDM will be happy to help, or you can contact us on ukpartner@fundingcircle.com.