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Why interest rates remaining low for at least another year is good news for the peer-to-peer business lending sector

Posted 3 years ago

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A survey by the BBC of the UKs leading economists suggests that interest rates are unlikely to rise before next year.


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In June three of the nine members of the Bank of England’s (BoE) monetary policy committee (MPC) voted to increase interest rates. Rates remained the same but since then noise has grown that interest rates could rise this year because inflation stands at 2.6% which is above the BoE target of 2%.

 

The BBC’s survey of some of the UKs leading economists suggests that this is unlikely. Most of the economists surveyed suggested no rate rise until 2018, whilst economists at Morgan Stanley said that they do not expect a rate rise until 2019. However, last week Michael Saunders, a member of the BoE MPC, said that a “modest rise” in rates was needed to curb inflation.

 

So why the discrepancy? Economists aren’t ignoring inflation data they just believe that the BoE will be reluctant to raise rates during Brexit negotiations.  Interestingly half of the economists contacted by the BBC expected to see wage growth outpace inflation in the first half of 2019. It should be noted that the latest report from the Chartered Institute of Personnel and Development is not expecting a great deal of wage growth in 2018 – they have predicted an average increase of just 1%.

 

Raising rates would be good news for savers and pension funds, but bad news for borrowers and personal debt levels in the UK are higher now than in 2008 when the financial crash hit and the emergency measures that we live in now – namely low interest rates and quantitative easing (QE) – were deployed. Members of the MPC looking to increase rates want to stop using emergency measures in order that they are available if and when needed again.  If the BBC’s survey is correct then theirs is a minority view amongst economists. Other fiscal stimuli available would include cutting taxes or raising government spending – relying less on central banks. Again, this view is gaining traction (and you can see it being applied in the USA by the Fed) but evidently most economists and the Government currently feel that maintaining low rates is beneficial.

 

For the peer-to-peer (P2P) sector maintaining low interest rates represents good news. As the businessagent.com rate comparison table shows, estimated annual returns from P2P business loans currently range from just below 5% to 12% - an attractive annual return relative to other investments like equity income and bonds, with average estimated income rates below 3%, and to cash where rates linger below 1% for most savers.

Further good news for P2P is that the Regulator, the Financial Conduct Authority (FCA), is authorising more platforms for an IFISA (Innovative Finance ISA) – meaning more people will be aware of and able to invest P2P tax efficiently. Data from the 2016/17 tax year highlights that the average IFISA account was £8,500 – in line with the average stocks and shares ISA account size.

 

Regardless of whether rates rise or not the outlook for P2P is improving and awareness of this type of investment is growing.

Tagged: p2p lending peer to peer lending interest rates IFISA Bank of England alternative finance BBC



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