Weekly Review: BoE Policy, Bridging Boom, SME Funding, and 2025 M&A Optimism

There have been key developments across the UK financial landscape that may have significant impacts on business owners and property developers.

From accelerating wage growth and the Bank of England’s cautious approach to interest rates, to the booming bridging finance market and increased funding opportunities for SMEs, these shifts highlight both challenges and opportunities. With private equity poised to drive a rebound in mergers and acquisitions by 2025, the stage is set for a period of renewed confidence, innovation, and growth.

UK Wage Growth Accelerates to 5.2%

UK pay growth accelerated in the three months to October, with average weekly earnings (excluding bonuses) rising by 5.2% year-on-year, surpassing expectations of 5.0%. Private sector wage growth, a key focus for the Bank of England (BoE), hit 5.4%, the fastest pace since May. This unexpected uptick has led investors to scale back expectations of rate cuts, fully pricing in just two quarter-point reductions by the end of 2025.

Despite the pay increase, the broader job market shows signs of cooling. Employers cut 35,000 payroll positions in November, and job vacancies dropped by 31,000 over the previous quarter, although they remain slightly above pre-pandemic levels. Businesses are also reducing staffing levels amid the impact of higher social security costs introduced in the recent budget, contributing to concerns about a slowdown in economic activity.

The unemployment rate held steady at 4.3%, but the reliability of this figure has been questioned due to ongoing issues with the Labour Force Survey. Analysts note the BoE faces challenges in accurately assessing the labor market's health, with data uncertainties persisting. As the central bank prepares to hold interest rates steady, it continues to balance concerns about stubbornly high inflation with emerging signs of economic weakness.

British Business Bank boosts Simply with £175m for UK SMEs

The British Business Bank has increased its ENABLE Funding commitment to Simply Asset Finance, enabling the independent lender to provide over £175m in financing to UK small and medium-sized enterprises (SMEs). Through this initiative, Simply will offer hire purchase, leasing, and refinancing solutions, helping businesses invest in equipment, boost working capital, and support growth. Since joining the ENABLE Funding programme in 2017, Simply has provided over £300m in funding to SMEs across five rounds of financing.

The ENABLE Funding programme, launched in 2014, supports smaller finance providers by warehousing newly originated finance receivables and later refinancing them through private sector capital markets. This strategy helps businesses access institutional investor funding. As part of this expansion, a private securitisation component will contribute to a wider transaction worth £0.7bn, enhancing funding opportunities for SMEs throughout the UK.

Reinald de Monchy of the British Business Bank emphasised the importance of this increased commitment to unlocking capital for SMEs and attracting private sector funding. Stefan Wolvaardt, CFO of Simply Asset Finance, highlighted the programme's role in fostering sustainable growth for UK businesses, underscoring the significant potential for SME market expansion and the importance of accessible financing to drive that growth.

BoE maintaining its base rate

The Bank of England (BoE) has maintained interest rates at 4.75%, announced on December 19, opting for a slower approach to reducing borrowing costs compared to other major central banks like the European Central Bank (ECB) and the Federal Reserve. While global inflationary pressures have eased, the BoE remains cautious due to concerns about persistent wage growth in the UK labor market and the inflationary effects of recent government spending plans. Investors had anticipated this decision, reflecting the central bank's measured stance.

The BoE's caution contrasts with expectations for the ECB, which is forecasted to cut rates more aggressively as economic challenges continue across the eurozone. UK policymakers are particularly concerned that rising social security costs for employers could drive up prices, even as business surveys suggest many companies are already considering job cuts. Despite fears of an economic slowdown, the BoE has signalled its commitment to a gradual approach, keeping inflation risks as its primary focus.

Looking ahead, financial markets project the BoE will implement three rate cuts totalling 75 basis points by the end of 2025, significantly fewer than the six cuts anticipated from the ECB. However, signs of a weakening labor market—such as declining job vacancies and reduced hiring—could prompt the BoE to reassess its pace. Ongoing issues with labor market surveys further complicate the bank’s decision-making, with upcoming employment data likely to play a critical role in shaping future policy.

Growth In Bridging Finance Market

The UK bridging finance market has experienced significant growth, with the total value of completions reaching £1.79 billion in Q3 2024, marking a 27.9% annual increase. Investment purchases emerged as the leading purpose for bridging loans, accounting for 24% of lending, while chain breaks and regulated refinance also played notable roles. Despite static average interest rates at 0.92% over the past year, bridging finance demand has surged, driven by stability in the Bank of England base rate and favourable market conditions.

Falling swap rates and a reduction in the Bank of England base rate to 4.75% are expected to make bridging loans even more attractive. The average 1-year and 5-year swap rates saw notable annual declines, signalling that bridging loan interest rates may decrease further. This enhanced affordability is likely to fuel continued growth in lending activity into the final quarter of 2024 and 2025.

According to Ashley Marks of Excellion Capital, the increased appetite for bridging finance reflects growing confidence in UK investment and development markets. Developers and lenders appear optimistic about the repayment of short-term loans, with lower rates and improving market conditions driving momentum. Marks predicts further increases in bridging lending as interest rates decline and market confidence continues to strengthen.

Private Equity Anticipated to Drive 2025 M&A Boom

Leading City bankers anticipate a significant rebound in mergers and acquisitions (M&A) for 2025, driven by private equity firms eager to deploy substantial capital reserves. This optimism is underpinned by expectations of reduced inflation and stabilised interest rates, creating a favourable environment for dealmaking. 

The private equity sector, with an estimated $4 trillion in available funds, is poised to be a major catalyst for this anticipated surge in M&A activity. Sectors such as technology, healthcare, and energy are expected to attract significant interest, reflecting broader economic trends and investment opportunities. 

Additionally, the recent U.S. election outcome is seen as a contributing factor to the positive outlook, with expectations that pro-growth policies will further stimulate dealmaking activities. This political stability, combined with strong corporate balance sheets, suggests a conducive environment for increased M&A transactions in the coming year. 

Summary:

This week’s developments highlight key trends shaping the UK’s financial landscape. While wage growth remains robust, the Bank of England’s cautious stance on interest rates reflects its balancing act between inflation concerns and emerging economic weaknesses. The impressive growth in the bridging finance market and increased funding for SMEs underscore renewed confidence in investment and development, pointing to brighter prospects for UK businesses. Looking ahead, the anticipated rebound in M&A activity, fuelled by private equity and improved economic stability, signals optimism for 2025. Together, these trends showcase a dynamic financial environment poised for growth, innovation, and recovery in the coming months.