Trump Vs. Brexit: Which Will Be More Disruptive for Borrowers?
3 minute read
Recent seismic political shifts have made our financial futures more uncertain than ever before. With Britain poised for a “hard Brexit” at an unclear future date, under unknowable terms, and the highly unpredictable Donald Trump now in the White House, it is virtually anyone’s guess what is in store for the economy over the coming months and years. But will Brexit or Trump prove to be more disruptive for British borrowers? Will our exit from the European Union trigger fiscal chaos or will Trump’s internationally resonant policies and activities send our economy into even more of a spin?
Brexit & Trump Trigger Gilt Yield Fluctuation
Both Britain’s future exit from the EU and Trump’s election had a marked financial effect on the UK. Following June’s EU referendum, the benchmark interest rates which the British Government pays in order to borrow from the capital markets (known as ten-year gilt yields) fell to historic lows, dropping to 1.383 in June and even further to a “lowest ever” rate of 0.506 in August. After Trump’s election however, gilt yields spiked, hitting 1.49 in November 2016, a full 1% higher than a three months previously, making it more expensive for the UK Government to borrow. To put these abstract figures into perspective, the ONS (Office for National Statistics) recently estimated that £3bn is added to the National Debt for every 1% rise in gilt yields, pointing to Trump as one of the most disruptive factors for the UK economy – and ultimately British borrowers.
Borrowing Rises Post-Brexit
But Brexit has had one very direct impact on British borrowers. Following the referendum, the Bank of England reduced (already low) British interest rates to a record low of 0.25% in a bid to stimulate the economy, amidst widespread worries about Brexit and the future of the UK. The Bank of England also announced a £100bn scheme which would force banks to pass these interest rates onto consumers. This interest rate slash has made it far more affordable for borrowers to access finance for loans and mortgages. Many anticipated the cut would be short-lived, but in December it was announced that the 0.25% interest rate would remain in place.
Sterling on the Slide
The factors behind the interest rate drop have much to do with the fall in Sterling following Brexit. In October 2016, following Theresa May’s “hard Brexit” speech, the value of the pound against the dollar fell beyond its post-referendum low, hitting its lowest point since June 1985. In the intervening months, Sterling has struggled and rallied slightly, only to fall back to major lows following the Supreme Court decision to make MPs vote on Brexit, which cemented the UK’s exit from the EU. The weakness of the pound has triggered higher inflation, forcing UK consumers to pay more for goods and services. This inflation rise is a key factor behind the Bank of England’s decision to continue the 0.25% interest rate.
What Matters More?
So, has Trump or Brexit had a more disruptive effect on UK borrowers? It’s impossible to predict the future, but with inflation rising, a tough EU farewell virtually set in stone and interest rates at rock bottom, it is our departure from the European Union which is affecting UK borrowers most significantly thus far. Buying a property and need advice on borrowing in today’s uncertain economy? Our expert mortgage advisers have their fingers on the pulse, so please get in touch with Just Mortgage Brokers today on 0800 114 3978.