Higher interest rates are a bullish signal for peer-to-peer platforms and digital banks
AltFi's David Stevenson argues that a series of interest rate rises over the next few years will not hamper the growth of fintech disruptors in the lending and banking markets.
The Bank of England’s Monetary Policy Committee has decided to raise interest rates for only the second time in a decade. The rate has increased by 25 basis points, or 0.25 per cent, increasing from 0.5 per cent to 0.75 per cent. In November, the Bank of England increased interest rates from 0.25 per cent to 0.5 per cent. At a rate of 0.75 per cent interest rates are now at their highest level since March 2009.
Most analysts in the City now expect further increases in the intertest rate, with the consensus forecast of at least one, possibly two increases of 0.25 per cent before 2020.
According to investment industry website Trading Economics, the market currently expects interest rates to hit 1 per cent by Q4 2018, 1.25 per cent by Q2 2019 and 2 per cent by Q3 2020. In the US, by contrast, the US Federal Reserve is guiding ‘policy rates’ close to 2 per cent and many analysts expect interest rates to peak at between 2.5 and 3.5 per cent.
This increase in interest rates is likely to be welcome news for savers, although there’s considerable scepticism amongst experts that the full rate rise will be passed on to clients. By contrast most experts expect mortgage rates to rise almost immediately.
According to the savings industry publication, MoneyFacts “ almost a decade ago, the average easy access account paid 1.19 per cent, whereas now it pays just 0.53 per cent. And the average one-year fixed rate bond currently pays 1.34 per cent, some 1.60 per cent lower than back in 2009”.
MoneyFacts most recent update on top paying notice savings accounts reported that challenger banks topped the list – Oak North provided a 120 day notice account which paid 1.78 per cent, closely followed by Secure Trust at 1.75 per cent and Paragon Bank at 1.66 per cent. By comparison many peer to peer accounts pay well in excess of 3 per cent per annum in income.
As for mortgages MoneyFacts reports that “the average two-year fixed mortgage rate increase from 2.33 per cent in November 2017 to 2.53 per cent today, and following today's announcement, the only way is likely to be up”.
The increase in interest rates – and the likely slow reaction of UK high street banks in increasing savings rates – is likely to be positive news for peer to peer platforms and digital banks. These have traditionally been keen to high light the meagre rates on offer and the gap between savings and lending rates.
Rhydian Lewis, at RateSetter said “it will be interesting to see how long banks take to pass the full increase on to savers – to be honest, the banks’ past track record is appalling. Interest rates for investors at RateSetter currently start at 3.2 per cent. The banks won’t hesitate to put up rates for borrowers. This means that the gap between the rates banks pay to savers and charge to borrowers will widen further – providing greater opportunity for highly efficient platforms like RateSetter that operate within that gap.”
Digital banks will also be under considerable pressure to react quickly to these interest rate increases. According to Starling Bank CEO, Anne Boden, "We will not be passing on to our overdraft customers the increase in the cost of borrowing following [the decision] by the Bank of England.."