- UK interest rates won’t stay low
- Private investment needed for growth
- Stability and clear plans essential
The CEO of the UK’s largest mortgage lender lays out the most significant issues for the next administration, warning that families should not expect a return to the ultra-low interest rates that have prevailed for most of the previous 16 years.
The CEO of Lloyds Banking Group, the UK’s largest lender, has cautioned that whoever wins the general election will be unable to drive growth by boosting government borrowing.
According to Charlie Nunn, the UK’s national debt has risen during the last decade and a half due to “massive shocks” such as the global financial crisis, the pandemic, the war in Ukraine, and other challenges peculiar to the UK economy.
Investment Limits
He stated that this would limit the next government’s ability to invest.
He stated, “We have increased the government debt ratio for the United Kingdom. We should acknowledge that the government cannot pay its way out of this next step.
The US government deficit to GDP ratio has reached 7.5% in recent years. The United States can do so since it is growing at more than 3%, and the US dollar is the world’s reserve currency.
We don’t have such options in the UK, but we want an apparent plan and set of priorities for the UK. The next step is to attract private investment in the UK, both domestic and foreign, to complement government efforts.
The largest challenge
We can generate positive momentum for job investment and company growth. This, in turn, will have an economic impact. That must be the key to overcoming the three or four major structural shocks that have hit the UK economy during the previous 16 years.
Mr Nunn, who has served on both Prime Minister Rishi Sunak’s business council and the British Infrastructure Council established by opposition chancellor Rachel Reeves, stated that this would be the most challenging problem for the future administration.
He said, “When you look at the next few years for the next government, the real issue is how are we going to get investment into the economy – and that investment will not come from the government.” It will have to attract international foreign direct investment by leveraging the banking system to truly support customers, investing in their businesses and creating jobs and employment in growth, and helping other financial institutions and pools of capital, such as pension funds, for that investment.
“So the real focus must be on getting some growth going and bringing in private money in tandem with the government to make a difference. And that will result in the best possible outcome for the country and the government’s budget.”
‘Very High’ business sentiment
Mr Nunn, who stated that business sentiment is “actually very high” at the moment, believes that a transparent government plan and set of priorities may unleash three things.
He said, “The first is that we need to attract more private investment into the UK, locally and internationally, to promote growth, which specific supply-side changes must accompany.
The second is housing. Housing is a critical issue in the United Kingdom, ranging from social housing to affordable housing and the whole housing market. You need a 10-year plan to unlock the housing investment required to make an impact truly.
The third thing that may make a difference is to focus on long-term savings and investments, not only to develop financial resilience for firms and households in the UK but also to use those savings pots to invest back in the UK economy.
“We think there’s an opportunity to do more.”
Investors are seeking stability and a plan.’
Lloyds owns Halifax, the UK’s largest mortgage lender, the UK’s largest current account provider, a significant participant in commercial banking and credit cards, and the life and pensions giant Scottish Widows.
Mr Nunn stated that as CEO, he met with many firms and understood their expectations from the incoming government.
He said, “I spend a lot of time with entrepreneurs around the UK and large international finance firms, whether they are pension funds or institutions looking to invest in the UK. The first thing they all have in common is a desire for stability and a plan.
“And the first step for a new government should be to bring stability and long-term thinking in some sectors, such as infrastructure and housing. So it is the first thing they are looking for.
“Consistently, businesses face supply-side difficulties that hinder their return on investment. And there has been much talk about planning, connectivity to the [electrical] grid, and skills. These are the three subjects that businesses consistently recognize.
‘It takes two to four times longer to receive a return on UK investment.’
“What does it mean for investors, whether businesses or overseas investors? Typically, they will tell you that it takes two to four times longer to receive a return on your investment in the UK than in other countries worldwide. And that’s where we need to concentrate.”
Interest Rates
Mr Nunn, who will celebrate his third anniversary as CEO of the black horse bank in August, said the Bank of England’s expected interest rate cuts later this year would be “beneficial” – but warned homeowners not to expect a return to the ultra-low interest rates seen for the majority of the last 16 years.
He went on to say that the short-term impact of interest rates will primarily affect the government’s debt costs. That’ll be significant. Second, it will significantly lower the short-term borrowing costs for firms.
It will take longer for the impact on the general consumer in the United Kingdom to become apparent. We’ve just come off a decade in which mortgage rates ranged between 1.5 and 2.5%.
“According to market projections, interest rates will likely remain over 3.5%. That means mortgages, or the new typical for mortgages, will be between 3.5 and 4.5%, rather than 1.5 and 2.5%.
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Based on what we observe happening right now, the cost of borrowing in the economy will most likely increase.
However, lowering interest rates will benefit the government’s ability to invest, economy, and businesses.
Bank of England’s plans
Mr Nunn also questioned suggestions for the Bank of England to pay no interest to banks on reserves held with the Bank of England, a step Reform UK claims may raise £40 billion that could be used to reduce taxes.
The Lloyds chief executive stated, “Obviously, that will be a political decision, and we will not be directly involved.” The Bank of England governor’s statement was significant in this context. He stated that supporting it would undermine monetary policy and how interest rates are fed into the economy through commercial banks, such as Lloyds Banking Group.
“This is a highly essential aspect. Numerous estimates exist for the quantum of influence, but the quantum of impact discussed is substantially higher than what I think is reasonable. So, it will be a political decision.
However, you must consider the integrity of the Bank of England’s actions and whether or not monetary policy is effective in the economy.”
Growth through financial regulation
Mr Nunn also stated that there was an opportunity for a new government to boost the economy through financial regulation, building on the current government’s new objectives for financial regulators, which required the Financial Conduct Authority and the Prudential Regulation Authority to enable competitiveness and growth in both the banking sector and the UK economy overall.
He clarified that he is not advocating a return to looser regulation before the financial crisis. Instead, he focuses on helping customers and businesses take the appropriate level of risk and what financial services can do to support that safely.
When I look at what the UK is doing compared to other nations, I don’t think we have an obvious objective, and there is more we can do to unlock potential for businesses and people in the UK in the future years.
He suggested that the US and Canada are ideal models for the UK.
