The MPC (Monetary Policy Committee) recently voted to cut the interest rates down to a low of 0.25%, the lowest we have seen in 7 years. This is part of the measures that Mark Carney is planning to put into place post-Brexit in order to ease any threats to the economy.
Some taxpayer-funded banks have not responded as quickly. However, Natwest, RBC and Lloyds Banking Group all spoke out to say they were still reviewing whether or not to pass the cuts, especially to mortgage customers. RBC has now put the interest rate cuts in place, leaving just Lloyds to follow. This is good news for borrowers, as interest rates are now at a record low; the cost of borrowing has now dropped. However, there are other repercussions we may expect to occur.
Savers will see a negative effect to come from these cuts. With interest only at 0.25%, after taking inflation into account, the capital gained is essentially nothing. So the big issue here is what can savers do about this and especially what will business account holders do?
RBS recently sent out a letter to 1.3 million small business owners warning them that if interest rates do become negative, they may be charged for simply holding deposits in their account. Business owners have expressed their concerns. Mike Cherry, Chairman of the Federation for Small Businesses stated “it is vital that all finance providers holding deposits from small businesses do everything they can to update customers concerned about any changes to their business current account during this uncertain economic period”. Banks have stated this will not affect personal accounts, but is this really good enough? What use is informing SME’s on the change, we need to see some form of action to prevent this situation from taking place.
Predictions for alternative finance providers to step up have been made, with many providers expressing their views on the matter. We may be likely to see a shift from investors into alternative & peer to peer lending if the banks continue to struggle. With lending rates at an average of 5-7%, the return is more attractive than 0.25% in your current account. Although you still have to take into account that the risks are higher. Of course, good quality and strong borrowers still need to be aware of these options in order for lenders to be successful and for loans to be placed, therefore we should be making sure that SME’s and borrowers are aware of all their options and are educated thoroughly on alternative finance. Providers need to respond to banks low rates for borrowing in order to stay competitive in the market.
With the uncertainty of the current economy and what the banks plan to do in order to tackle this. It’s a great opportunity for alternative finance providers to step in. This helps ease financial struggle, not only for SME’s, but also investors and lenders. As saving rates are at an all time low and with small businesses at the risk of seeing negative interest rates, it could be likely that we see a shift in how they plan on banking in the future and where investors plan on putting their capital.
Please remember that when investing into peer to peer providers and alternative providers that you have read and understood the risks. These investments come with higher risks and your capital could be lost. To take a look at current investment opportunities, please visit here.