Published on November 14th, 2016 | by admin0
How will Inflation affect P2P Lending in 2017?
The Bank of England recently put out a revised forecast of the economy’s performance for 2017, adjusting their predictions for inflation to almost three times their previous estimate (from 1% to 2.7%). This forecast has also included a prediction that economic growth will remain sluggish over the next few years, with growth for 2018 reduced from 1.8% to 1.5%. But what do these changes mean for the peer to peer lending sector, and how should investors respond?
The first thing to bear in mind is that these predictions are no more than best guesses in response to the highly volatile value of the sterling. In response to Brexit developments, the foreign exchange market has fluctuated, causing substantial uncertainty amongst investors. Mark Carney, the Governor of the Bank of England, said that this estimate was “just one of many twists and turns that are likely to happen” as the UK leaves the EU, so any alterations to economic forecasts should be taken as a revised estimate, and not a cast-iron guarantee.
That said, even if the Bank of England isn’t spot-on with its predictions, there are some implications for the P2P finance industry, chief amongst which is the Bank’s base rate. The Bank’s target rate of inflation is 2%, and a rate in excess of this will likely cause them to raise the base rate in response. This will have the effect of raising the cost of borrowing across the board, and incentivise saving rather than spending.
This means that P2P lenders could raise their rates (which have been kept low in line with general interest rates), as the market rate for borrowing increases. However, in an economy with limited growth and an unclear future, it seems fair to assume that the consumer credit market will remain fairly sluggish. This may well require that lenders keep their interest rates low to attract customers, so an increase in the Bank of England’s base rate may well not cause a corresponding rise in the costs of consumer credit.
Investors would do well to keep an eye on the news, as future developments seem set to influence the course of the UK economy. It is fairly likely that 2017 will see an increase in inflation and a corresponding raise in interest rates – how much by, and what impact this has, is yet to be seen.