Central banks last week largely dispelled doubts about whether moderating inflation or financial stability would come first. Alex Ogario, Head of our Private Office, shares his thoughts on the latest shifts in the market and implications for borrowing.

The collapse of Silicon Valley Bank on March 10th made it reasonable to question whether central banks would continue their efforts to bring inflation back to target or pause in the face of mounting risks to financial stability. Unless another major bank begins to wobble, that question is no longer in doubt.

The Federal Reserve on Wednesday opted to raise the Federal Funds Rate to 4.75% – 5.00%. Fed chair Jerome Powell admitted that economic indicators since the previous meeting had generally surprised on the upside and, even though the collapse of SVB “would result in tighter credit conditions”, the committee opted to keep tightening anyway. Granted, Powell chose to soften language about further increases, but it’s clear that inflation remains the priority.

We got similar messaging from the Bank of England on Thursday. After raising the base rate by 25 basis points to 4.25%, the Monetary Policy Committee minutes made soothing sounds about the stability of the UK banking system, which “maintains robust capital and strong liquidity positions, and is well placed to continue supporting the economy in a wide range of economic scenarios, including in a period of higher interest rates.” In other words: the banks can handle it; we’re staying the course.

Granted, I started this piece with a large caveat. “Unless another major bank begins to wobble” gives me a lot of wiggle room and at this stage there is much we don’t know.

Interest rates in the UK are now at their highest level since 2008 and many of the real-world impacts of that tightening are yet to be felt. Clients understandably want our views on where rates are headed next and how they can best position themselves. The former is still subject to a lot of uncertainty, and I hope you’ll excuse me if I don’t commit much to paper, but we can always help with the latter.

Retail banks generally allow borrowers to book a rate as many as nine months in advance which can be renegotiated should conditions change. Many private banks fix at the date of drawdown, and knowing a little about the methods lenders use to price their products can go a long way.

Some buy tranches of funding that they allocate to mortgages on a first come first served basis while others price instantly against swaps. Finding lenders with tranche funding available has been a reliable method to save money while borrowing costs have been rising so quickly. That’s still the case, but the best option will flip should rates start to come down, which looks possible in early 2024 or even later this year.

Whether to take a tracker or a fixed rate remains a contentious topic and the answer is always highly personal. The proportion of prime borrowers taking fixed products with Knight Frank Finance peaked back in September and fell sharply in the wake of the mini-budget. Fixed products have recovered, but not entirely. Borrowers with enough free cash flow are generally choosing to gamble on tracker rates, taking a view that it won’t be long before central banks are forced to pivot.

The question isn’t always black and white, of course. Several private lenders allow clients to divide loans into tranches, fixing some for various periods and allocating others on a variable basis.

There are other factors to consider. Many wealthy clients – for example those buying new properties some way from completion – like to explore interest rate swaps with a view to hedging their interest rate exposure before drawing down the loan.

There is a lot to consider, and it’s worth speaking to a well-connected advisor to better understand the options. Just don’t believe anyone that speaks with confidence about the path of interest rates. Even central bankers are in the dark about that.

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