Last week, the Bank of England’s monetary policy committee voted unanimously to raise interest rates from 0.5% to 0.75%, their highest level since 2009. It has been suggested that the rise will help to slow the rate of inflation alongside being a means to reduce unsecured credit, which recently reached over £300 billion. However, it is a positive sign that the overall fundamentals of the economy remain strong.
But what does this mean for you? The rate rise will result in mixed implications for businesses and investors. For investors, this will depend on their individual scenarios: for example, holders of variable rate mortgages will instantly see their monthly payments increase. It’s also plausible that savings accounts will increase their rates, but banks are under no obligation to do so. Within the context of Crowd2Fund returns, a 0.25% increase is negligible in the increased returns offered in comparison to a savings account.
The effect this will have on businesses is that it will cost more to borrow from incumbent financial institutions; in fact, a number of business representative groups have already released public statements saying that they believe the rate rise will put too much pressure on the economy.
Impact for Investors
Variable Rate Mortgage Holders
Variable rate mortgage holders are set to lose out as many well-known providers put up their fees within 24 hours of the rates rise announcement. This will put a squeeze on household finances— mortgage holders may want to consider their investing and savings strategies in order to make up for this shortfall.
Banks May Not Pass on the Rate Increase to their Customers
There is no guarantee that the banks will pass on the increased rate to savers. During the last rate rise in November 2017, which was also 0.25%, most banks did not pass on the full increase to savings customers. At present, most of the large banks are still reviewing whether to increase the rate on their current and savings accounts.
Switching Funds to Innovate Finance ISAs (IFISAs)
Currently, the best buy easy-access savings account only pays 1.4% APR, with the best performing easy-access cash ISA offering a slightly lower APR of 1.35%. Even if the full rate rise is passed on, these options will generate a return of just 1.65%, which is lower than the current rate of inflation (2.4%).
Savvy investors with money tied up in savings accounts or cash ISAs should use this as an opportunity to consider investing or transferring these funds into an IFISA facility, such as Crowd2Fund, which generates average APRs of 8.7% per annum (before fees and bad debts).
Businesses
Higher Borrowing Costs?
There are no two ways about it, this rise will require companies to pay more for borrowing money. Several business trade organisations have already spoken out against the rate rise, PRESS RELEASE Crowd2Fund Response to BOE rate rise expressing concern. The Institute of Directors (IOD) have accused the Bank of England of “jumping the gun,” while the The British Chambers of Commerce criticised the move as “ill-judged against a backdrop of a sluggish economy.”
The Cost of Borrowing Criticised
The Federation of Small Businesses (FSB) were concerned prior to the rate rise that interest rates were already too high for SMEs. From their own research they found that “42% of small firms describe new credit as “unaffordable.”” FSB chairman Mike Cherry commented on the increasing importance of access to credit for small businesses by saying, “we need to see a fundamental shift in the UK’s small business culture. Too many firms are reluctant to borrow and realise their full growth potential.”
Yet this may be due to small businesses not being able to access the cheap credit from the banks anyway, due to cautiousness from the banks with enhanced regulations since the collapse of the banks in 2008. Therefore, alternative lending is an invaluable source of capital for small businesses.
Opportunity to Seek P2P Loans
The rate rise creates an opportunity for businesses struggling to access debt from traditional banks to consider P2P finance. Alongside simple and more holistic credit decisions than incumbents, this has many other benefits. In somem, as with Crowd2Fund, one can have fast access to finance— with a range of different finance products to choose from— while building a community of brand advocates.
For further information visit Crowd2Fund
