Current Affairs

P2P: A silver lining for base rate misery

It was yet another dark Thursday for savers and investors in the UK. News that base rates were to stand firm at a record low of 0.5% would hardly have been a shock to the system, but for those not already numbed by six-and-a-half years in the doldrums, the Bank of England’s (BoE) inflation report was a bitter blow.

The revised forecast cited that even if UK interest rates were to remain as they are until early 2017, CPI inflation would be unlikely to edge above its 2 per cent target. The dovish tone of this message has left little room for interpretation among economists, and if lift off is to therefore be deferred until 2017, it would mean eight years of unchanged borrowing costs – the longest such period of inertia since 1950.

A sucker punch for savers

For borrowers and those with (variable) mortgage repayments to make, it was due cause to put on a celebratory pot of tea. But for those at the other end of the spectrum, it compounded a misery which has already condemned them to derisory rates of return on savings accounts, bonds and relevant investments for so long.

As if to put the nail in the coffin, there was also a downward adjustment on forecast growth for this year to 2.7 per cent (and to 2.5 per cent for 2016 – down from 2.7 per cent) by the BoE, coupled with the observation that emerging markets are continuing to perform poorly against the backdrop of global economic uncertainty - as if to underline their stance.

It sets a pretty grisly outlook for investors and retirees attempting to find a viable home for their money, especially for the latter, whose pension funds are typically very closely linked with interest rates. It also hardly cultivates an inspiring environment for saving in general, which, in turn, is no great thing for the economy.

The argument for peer-to-peer lending

But it isn’t all doom and gloom. Such conditions encourage savers to find alternatives, and, of the abundance which are actually out there, peer-to-peer lending (P2P) in particular presents an oasis of sorts. Annualised returns of up to six per cent for only a small – and transparent - risk at such a disillusioning time stand out like a sore thumb, and have been chiefly responsible for the sector swelling significantly over the last two years. Add to that the tax efficiency of the incoming Innovative Finance ISA (and the inclusion of P2P within the Personal Savings Allowance), and its appeal will only be enhanced further.

Interestingly, from a strictly relative point of view, a platform like Lending Works is theoretically no better or worse off if base rates increase or not. Should lift off eventually occur, our returns for lenders would increase in kind, but there is nothing to suggest that the proportions of such an increase would be lower or higher than the movements of other ‘comparable’ asset classes.

Yet there is one important exception to the above. In truth, there will more than likely be a lag from the time the Bank of England does eventually decide to up base rates to when we see an actual increase in savings rates. The direct link between the two was all but severed in the wake of the recession, when the latter continued to plummet for years after the former had bottomed out. This was largely attributed to the introduction of the Funding for Lending scheme, which made banks far less dependent on savings deposits for capital.

What it all means is that the gulf in benefit between lending through peer-to-peer and putting your money into the bank may even widen when rates do rise. Certainly, consumers can be confident that our efficient and agile model will ensure that if there is any benefit to be had for the lender, it will be passed on in its entirety, and without delay.

Until such an elusive day arrives though, we’d encourage anyone who is unsatisfied with the returns they are currently getting on their savings and investments to have a second glance at their portfolios. That’s not to say drastic measures need to be taken, but rather to take note that, even at this difficult time, there are a myriad of good-value investment options at your disposal. There can be no harm to come from at least looking into them.

Main image "Corner of the Bank of England" by Robert Moore. Image subject to copyright. A link to the image and appropriate licence can be found here. You must not use or reproduce this image other than in accordance with the licence.

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Michael Todt

Mike joined Lending Works in early 2015 with a background in marketing and journalism. Having long held a passion for economics, he is now the chief contributor to the Lending Works blog, and regularly writes about all things peer-to-peer lending, fintech and personal finance.