Happy New Year
Posted on 29th December 22
As the year draws to a close, CEO, Kevin Gray, looks ahead to 2023.
“I have resolved that the New Year will deliver a ‘new Kevin’, one that is significantly fitter than the current and somewhat creaking model, and one that has generally cut down on ‘excess of life’. Perhaps the road to hell is paved with good intentions, but I start 2023 with a determination to exercise more and to reduce my intake of rich food and accompanying alcoholic beverages. Sadly, on this personal level, there can be no gain without some pain!
With regards to Bath Building Society (BBS), my colleagues are ready to tackle the challenges that we will undoubtedly face in 2023. With the UK economy heading into recession, there are likely to be some very testing times ahead for all of us. I will let you into some of the Society’s planning assumptions that we are using to plot our course through the choppy waters that lie ahead.
In 2023, the Bank of England (BOE) is likely to continue to raise its base rate. The scale and timing of future increases are uncertain, but the markets are currently predicting that another 0.5% increase will occur in February. BBS currently believes that the BOE will not raise its base rate beyond 4% as, in our opinion, that is likely to be sufficiently high enough to start a downwards squeeze on inflation. After more than a decade of exceptionally low savings rates, the good news is that the higher base rate will feed through to higher rates for savers. The bad news is that interest rates on mortgages that are linked to lenders’ Standard Variable Rates, or which track the BOE base rate, are likely to increase further. Existing borrowers with fixed rate mortgages will be immune from higher interest rates, at least until their current deals mature. Those coming off their fixed rate deals in 2023 are likely to face a sudden and painful increase in their monthly payments given that, for example, two-year fixed rate deals are now being priced at above 5% whereas similar arrangements were priced below 2% only a couple of years ago. In summary, higher monthly mortgage payments are likely for many borrowers, and this will sadly put added pressure on already strained household budgets.
The Society is assuming that the rate of inflation will start to reduce from the middle of 2023 and that it will have fallen towards 7% by the end of the year. All reductions in inflation should be welcomed but with wage rises likely to lag significantly behind, real living standards will continue to be squeezed for some time to come. With the ongoing war in Ukraine, there remains great uncertainty about the future direction of energy prices. The UK government has not yet indicated the scale and nature of future price capping to help households and businesses survive in a world of much higher energy prices. Worryingly, future support is likely to be more ‘targeted’ which is political code for some households and businesses seeing potentially reduced support.
The BOE is expecting the UK unemployment rate to climb in 2023 as businesses shed labour to protect themselves from a combination of falling sales and increasing costs. 2023 will see the full return of ‘stagflation’ i.e. high inflation combined with flat or negative economic growth.
Like most mortgage lenders, BBS is expecting the combination of higher unemployment, higher living costs and higher mortgage payments to result in higher levels of default on its mortgages. Although the Society will do its utmost to help borrowers who are having difficulty in maintaining their mortgage commitments, the likelihood is that repossessions will sadly rise. With property prices set to fall in 2023, there is a lot of potential for defaulting borrowers to lose their equity and/or for lenders to crystalise losses on disposal of properties.
As a deposit taking and mortgages business, BBS will not be immune to the worsening economic situation. We are budgeting for reduced profitability driven in part by higher costs and higher levels of loan impairment, but also by higher levels of business investment. Today’s investment will be tomorrow’s growth.
The current economic forecasts are frankly pretty miserable and 2023 may be a grim time for many. As a born optimist, I can only state that the economy will pick up at some time in the future and that better times do lie ahead for all of us.
Wish me luck with my personal resolutions. I wish you all a very happy and prosperous 2023.
