What does the new Bank of England base rate mean for P2P lending?
In case you missed it, at the start of August the Bank of England’s Monetary Policy Committee voted to implement a new round of measures to stimulate the national economy. These initiatives include a £60 billion investment in Government bonds, and a £10 billion investment in private bonds; a reduction in the base rate to 0.25%, and a “Term Funding Scheme” to encourage banks to pass savings on to their customers. This new historic low for interest rates understandably has savers rattled and mortgage-holders rejoicing, but what does it mean for those loaning and borrowing through peer to peer lending?
Implications for lenders?
A further decrease in interest rates makes putting your money away in a bank account an even less appealing option – with the highest current account rate standing at only 3% before the rate reduction, there is little incentive to save. Consequently, the higher interest rates offered by peer to peer lending look more attractive, and it’s likely that these platforms will see more lenders investing more heavily.
Implications for borrowers?
A lower base rate typically means that banks who borrow from the Bank of England will offer cheaper loans, reflecting the rate at which they’re being charged interest themselves. Since peer to peer lending is not funded in this way, there’s no reason to suppose that P2P loans will become any cheaper; bank loans stand to become slightly less expensive for borrowers, while peer to peer loans do not.
Implications for the P2P industry?
As we’ve seen above, peer to peer lending will become a more attractive option for lenders but a less attractive one for borrowers, which could potentially create an imbalance of supply and demand: P2P lending companies need to match loans to borrowers in order to offer a useful service, and if there’s too much money and no-one to lend it to, there are fewer opportunities for lenders to make a good return on their investment.
In this scenario, it’s possible that peer to peer companies could decide to match their high street competition and offer cheaper loans as well, but as they’re not able to take advantage of the lower base rate they’ll need to find room in their balance sheet somewhere, potentially by reducing the return offered to lenders.
Looking Forward
The new base rate is likely to have an impact on peer to peer lending, though the exact nature of this won’t be clear for several months as retail banks and P2P companies adjust to the new lending climate. Peer to peer lending is flexible enough that it’s likely to remain a rewarding alternative to high street banking, and the industry looks set to continue growth.
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