Bank lending to return to growth in 2024 despite inflationary pressures
Bank lending to UK businesses and households to return to growth this year, and accelerate over 2025 and 2026, according to a new report from EY. The report comes as discussion over the lowering of rates builds momentum in the UK, suggesting the demand may rise further in the coming period.
Anna Anthony, UK financial services managing partner at EY, stated, “The UK’s macroeconomic environment has been extremely challenging in recent years, but it appears we are now turning a corner. Although we are yet to see the full economic response to the Autumn Budget and the US election, deepening signs of economic recovery are giving firms and households increasing reason for optimism. Falling inflation and interest rate cuts should boost borrowing appetite over time, and the outlook for bank lending in the UK is more positive than it has been in a number of years.”
With a decisive election result delivering a degree of certainty to the UK economy in 2024, the economy is predicted to be set for steady GDP growth in the coming two years. For 2024, the annual rise is projected to be 0.9% by EY, but this is forecast to rise to 1.5% in 2025, and 1.6% in 2026. This growth is expected to already be feeding into demand in the banking sector.
Total bank lending to UK businesses and households is forecast to return to growth this year, with EY suggesting that it will hit a net growth of 2.6% for 2024 – in contrast to a -2.2% net contraction in the previous year. Provided inflation and interest rates continue to gradually fall, the researchers added that borrowing appetite is expected to increase as the cost of capital lowers – hitting net growth of 3.7% in 2025 and 4.3% in 2026.
However, UK inflation has since surprised commentators, by rising to 2.3% – thanks in part to energy price hikes ahead of the winter. During the cost-of-living crisis, where inflation regularly ran into double-digits, the Bank of England ramped up the nation’s interest rate, making the cost of loans, credit cards and mortgages, more expensive. And this latest set-back may well mean that the Bank of England does not lower its rates in the way some had hoped.
The Bank cut interest rates to 4.75% from 5% in the autumn, in a move that had been widely expected. But it also hinted at there being fewer, slower cuts in the coming months – and the latest inflationary figures will increase pressure not to change the rates at all. Should that happen, banks may have to wait for their demand to bounce back further.
Anthony added, “While this outlook is promising, optimism should remain measured. If recent history has taught us anything, it is that economic shocks can come at any time. The UK financial services industry must continue to shore up its capital strength while investing in key strategic areas to ensure it capitalises on growth opportunities and maintains its position on the international stage.”
