2 November 2022 Interest rate hike (again)

Interest rate hike (again)​

What do you need to know this week?

The Bank of England is set to convene tomorrow, 3 November. The topic of the meeting is again interest rates. It is almost guaranteed the BoE’s policymaker will raise rates. The question is by how much?

As the Financial Times reported on Monday, the markets have priced in a 0.75% increase, which would be the single highest rate rise since 1989 and raise interest rates to levels not seen since the 2007-08 Global Financial Crisis.

Why is this important for your interviews?

TCLA’s commercial article team admits that we may sound like a broken record when it comes to rehashing news about interest rates and inflation. But to this, consider two counterpoints:

First, few things can and do dictate the short-term activity of financial markets to the same degree that interest rate hikes and monetary policy can.

Second, one of the essential criteria interviewers use when assessing your commercial awareness is the extent to which it is both topical and relevant.

In other words, changes to the Bank of England’s base interest rates will almost always be topical because they have profound implications for financial markets, which in turn influence to varying degrees the activity law firms undertake and the advice they give clients.

But for your input to be relevant, it is important to stay on top of these developments. This is especially the case where you intend to voluntarily raise them in the context of an interview. In practice, a cursory review of the BBC’s business headlines or listening to the Financial Times daily AM podcast will help you ensure you don’t miss anything of substance.

Likewise, you should always reflect on how the most recent development influences your own understanding of the wider commercial implications. That said, in many cases you do not necessarily need to modify your argument or thesis. In this case: further rate rises indicate that inflation remains out of control and likewise that the Bank of England is willing to take the steps it considers difficult but unnecessary. Even where the effect may ultimately hamper the growth of the economy.

How is this topic relevant to law firms?

From the perspective of transactional law firms, deal volumes are unlikely to return to their 2020-2021 heights. In fact, they are likely to continue to decline because as interest rates continue to rise, the cost of credit will increasingly put off opportunistic buyers that rely on cheap debt to finance the transactions.

Exceptions to this exist for certain special situation investors prepared to acquire distressed companies at a relative discount. Likewise, various credit funds have already begun deploying substantial amounts of unused investment capital (“dry powder”) to acquire discount debt as concerns mount over whole sectors’ abilities to service increasingly expensive debt.

Law firms with flexible corporate transactions teams that can pivot away from traditional leveraged buyouts towards clients in the special situations and distressed spaces may be able to offset the primary effect of declining deals.