Funding measures that the Bank of England (BoE) unveiled last week should help offset the impact of lower interest rates on U.K. banks, says a new report from Fitch Ratings Inc.
The New York-based credit-rating agency’s report suggests that the BoE’s £100-billion Term Funding Scheme (TFS) “should partially offset the lower margins” at U.K. banks stemming from the accompanying interest rate cut. The new funding scheme is part of a series of measures designed to support economic growth amid the negative shock of the Brexit vote.
The Fitch report says that the TFS “will provide a new source of cheap funding” for banks. “We expect the majority of lenders to make use of the scheme because its 25 [basis point (bps)] charge is substantially lower than funding costs in wholesale markets or savings deposit rates.”
However, Fitch also notes in its report that the extent to which the funding scheme will bolster margins “will be linked to the amount of new lending extended by each bank and the deposit rates they offer.”
Firms that expand net lending between now and the end of 2017 will be able to access more TFS funds, it notes, whereas, if lending shrinks, they will not be able to borrow more and TFS funding costs will rise.
The TFS will also indirectly reduce funding costs “because it will enable banks to force down deposit rates,” the report says.
“With the generous-sized scheme, we think competition for deposits will fall and lenders will readily pass on the BoE’s 25 bps base-rate cut to savers,” it says.
Fitch adds in the report that it expects the U.K.’s gross domestic product growth to slow to 1.7% in 2016 and to 0.9% in 2017.
“The Brexit negotiation phase is likely to mean that companies might delay decisions on non-urgent investments reflecting greater caution, and consumer spending and housing transactions could slow,” the Fitch report says. “We expect any reduction in loan growth in the foreseeable future to be driven by lower demand rather than funding supply given the number of measures introduced by the BoE.”