UK to Keep Policy Rate at 5.25% till Q3 –Fitch
Bank of England (BoE) would maintain a monetary policy rate of 5.25% until the third quarter of 2024, Fitch Ratings projected amidst expectation that UK economic growth will remain under pressure in the year.
In its latest update, Fitch projects another year of near-stagnation with an estimated growth rate of 0.2% in 2024, with gross domestic product (GDP) growth recovering to 1.7% in 2025.
The global ratings firm revised the outlook on the ‘aa-’ operating environment score for domestic UK banks to stable from negative, following the revision of the outlook on the UK’s ‘AA-’ sovereign rating to stable.
It said the sovereign outlook revision and the change in the outlook for the operating environment score have no immediate impact on UK bank ratings.
Fitch affirmed the UK at ‘AA-’ and revised the outlook to stable from negative on 22 March. The outlook stabilisation reflects Fitch’s view that economic policy risks have eased since Fitch assigned the negative outlook in October 2022.
It also thing that general government debt/GDP would be broadly stable from the end of 2025.
Operating environment scores for banks capture Fitch’s assessment of the ability of banks in a particular jurisdiction to generate business volumes while taking on acceptable levels of risk and usually has a significant influence on Fitch’s assessment of other key rating drivers for a bank’s Viability Rating (VR).
The operating environment score is constrained by the UK sovereign rating due to domestic banks’ high exposure to the sovereign and the domestic economic environment.
At the same time, it is underpinned by the UK’s high per-capita income of USD48,000 in 2023 and favourable business environment, ranked in the 91st percentile under Fitch Solutions’ Operational Risk Index.
Fitch stated that risks to UK banks’ rating headroom have eased with the revision of the operating environment score outlook.
Under Fitch’s Bank Rating Criteria, banks operating in weaker environments need stronger metrics to achieve the same implied scores for the key rating drivers on which their VRs are based.
However, the UK sovereign rating action does not trigger any bank rating actions as the vast majority of UK bank ratings have Stable Outlooks, reflecting good rating headroom and generally strong capital, liquidity, and loss-absorption buffers.
Despite the stabilisation of the outlook, Fitch ratings said it continues to expect a challenging macroeconomic environment for UK banks in 2024 as the effects of higher interest rates on the economy become increasingly visible.
This will weigh on banks’ performance, but analysts expect asset-quality deterioration, higher funding costs and competitive pressure on lending margins to have only a slight impact overall.
Fitch projects another year of near-stagnation (0.2%) in 2024, with GDP growth recovering to 1.7% in 2025.
The further stated that it expects the main policy rate of 5.25% to be maintained at least until 3Q24 given still-high wage growth and inflationary pressures, before being lowered gradually to 4.25% by end of the year, and 3.5% by end-2025.
However, a severe setback to macroeconomic expectations, for example through materially higher interest rates, inflation or unemployment, would put pressure on our operating environment score for domestic UK banks, and banks’ credit profiles, Fitch said. #UK to Keep Policy Rate at 5.25% till Q3 –Fitch
