Kevin Caley, founder and chairman of ThinCats reveals how he believes lower interest rates will impact p2p lending.
Last week marked a historic day for the UK economy. The Bank of England announced a 0.25 per cent cut to interest rates and a raft of monetary policies to encourage growth in the wake of the referendum. A 0.25 per cent base rate is the lowest we’ve ever seen, it’s the first time the monetary policy comittee MPC has cut interest rates in seven years, and the committee is not ruling out a further cut later this year.
As expected we’ve already seen banks and building societies review the savings and mortgage rates they pass on to customers but the impact is less clear in the emergent P2P sector. Inevitably, there will be some changes to the rates of return that lenders receive, but whether this will actually have a tangible effect on the appeal of P2P, is doubtful.
In reality, a 50 per cent reduction in base rate is only a 0.25 per cent fall, and that will not, in itself, make much of a difference to the industry. P2P rates are not directly related to market fluctuations and don’t track the base rate in the same way that some bank rates do. P2P lending remains one of the few investment opportunities that is non-volatile and can comfortably beat inflation.
The Bank of England has used monetary policy in an attempt to stimulate the economy, by encouraging banks to lend – a move that will be welcomed by businesses in need of funding to grow. If it has the desired effect, it will increase bank lending but it won’t change the structural and cultural reasons that encourage businesses to turn to P2P for finance. The economy needs businesses to invest and grow and overcome the cloud of uncertainty that is currently limiting the ability to do so.
Exporters will likely benefit from a further weakening of the pound and this in itself will have more impact on the economy than the change in base rate. Monetary policy will help oil the gears, but the reality is we need far reaching fiscal policy to fuel the engine of British business. For this reason I welcome the abandonment of the blind austerity and the belief that we have to balance the books. Such political dogma was never fully justified, and proved almost impossible to achieve. In the end we have suffered from years of austerity for no real gain. For P2P business lenders, genuine fiscal stimulus can only be a good thing for the variety and quality of loans on the platform.
Aside from the focus on interest rates, the Bank has also added some additional measures in order to fund cheap lending to businesses and households under certain conditions. The new 'Term Funding Scheme' will allow banks to borrow money for four years at 0.25 per cent. This appears to be an attempt to ensure that banks actually pass the rate cut on and is not miles apart from the old Funding for Lending Scheme which was explicitly designed to help SMEs borrow. The Funding for Lending Scheme may have marginally increased lending to businesses, but it has been a disaster for savers.
By providing a steady stream of cheap money for banks to lend, there was little incentive for them to attract deposits from savers, weighing down available rates. At best the scheme was a short sighted attempt to mask the fact that banks are simply not lending enough. At worst it’s yet another tax on savers, who have been picking up the bill for the banking excess that caused the credit crunch. An extension of the FLS will only drag this out further.
Even with this additional incentive for banks to lend, we’ll have to wait and see whether businesses really do benefit from the scheme. Given the fears about the economy, banks will also become more fearful that companies and individuals will default, which could tip the scales in the other direction.
In this environment, P2P lending has emerged as a genuine alternative to this type of intervention, producing investment income four or five times greater than bank deposits, while simultaneously providing business loans to fill the funding gap left by the banks. When all is said and done, a base rate cut won’t alone be enough to drive business-led growth in the economy and may put some downward pressure on returns, but for peer to peer lenders and the platforms they use it will be water off a duck’s back.