For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
The impending boost of a BOE rates increase
Something is brewing at the Bank of England, and, more specifically, within its Monetary Policy Committee (MPC). After seven years of voting unanimously (bar a brief disagreement in 2011) to keep base rates on the floor, the MPC agreed to cut these to a new record low of 0.25 per cent last August.
Yet in the months since, we’ve seen the economy largely hold up better than expected following the Brexit vote, and, more recently, a surge in inflation. It prompted a surprising break from unanimity last Thursday, as three MPC hawks put their hands up for an increase to 0.5 per cent. The 5-3 split vote did, however, exclude Mark Carney, and the Governor poured cold water on the prospect of a monetary policy tightening in his Mansion House speech on Tuesday.
However, the pound rallied on Wednesday, as one of the Committee’s more-dovish members, Andy Haldane, said that "a partial withdrawal of the additional policy insurance the MPC put in place last year would be prudent relatively soon," during a speech in Bradford.
Why we can be confident of an imminent increase
Although it must be pointed out that one hawk, Kristin Forbes, has now left the MPC, there are sound economic reasons for believing that the central bank will tighten their belt sooner rather than later. In 2011, the last time there was notable dissent within the ranks, the unemployment rate stood at 8 per cent. Today, it has plummeted to just 4.6 per cent, suggesting that Britain has either reached, or is approaching, full employment.
Signs already exist that the supply of labour from Europe has diminished since the Brexit vote, and, should that trend continue, wages will increase too. This, in turn, will exert further inflationary pressures, which, until now, have largely been fuelled by a depreciation of sterling over the past 12 months. Needless to say, spiralling inflation will force the Bank to act at some point.
There is another inflation-related reason why we can expect an increase too. Across the Atlantic, the Federal Reserve once again voted to lift short-term interest rates – the third consecutive quarter in which they have tightened policy. Given that the US is our biggest single trading partner, failing to follow suit would simply result in further imported inflation.
And then there are the ramifications from an unsettled political landscape, following the Election result. The Conservative Government was forced to ditch some key money-saving manifesto pledges from the Queen’s Speech, and with increased pressure to invest in public services, a spike in spending now appears inevitable. With fiscal policy set to become the new driver of output, rather than so-called quantitative easing, we could well see interest rates tighten significantly to pick up the slack. Not only would this represent a reversal of the current austerity/loose monetary policy combination, but it would also finally give savers a ray of light after years of unrelenting dark clouds.
Bank of England rates and peer-to-peer lending
Many will have noticed that, following the rate cut last August, returns offered by peer-to-peer lending platforms in the UK have generally followed suit. It is, however, important to note that monetary policy decisions actually have no direct bearing on how a platform such as ours sets the base rates from which we determine lender returns.
That said, the inevitable knock-on effect of last year’s rate cut was that the market for loans became increasingly competitive, and, in order to maintain the equilibrium between the demand for Lending Works loans and the supply of lender capital, there has invariably been downward pressure on returns.
It is thus left to individual platforms to find other ways to redress this balance, and, for Lending Works, this has meant numerous initiatives and partnerships to unlock new channels from which to originate prime loans. These have already started to bear fruit, as has been demonstrated by the recent surge in our 5-year lender return (an increase of 0.4 per cent in just two weeks). The month of June continues to be a strong one for loan growth too, so there is good reason to believe the gap between returns and inflation will continue to widen.
And, should Carney and Co. decide that the time is right for monetary policy tightening in the near future, then that really would be the icing on the cake for our lenders!
The 2019 ISA season is now in full swing, and it's as good a time as any to focus on financial planning - and, within that, looking ahead to your retirement years to ensure financial security.
The Lifetime ISA (LISA), announced in 2016, would prove to be one of George Osborne’s last flagship gestures to UK savers and investors as Chancellor, eventually launching against a backdrop of anti-climax a year later in April 2017.
As the tax year end approaches, the financial services industry readies itself for a flurry of activity. That's in large part because, with just a couple of months to go, the so-called 'ISA season' is upon us.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Loan underwriting is the process that we undertake to analyse all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets our minimum loan criteria. As part of that process all data is verified, analysed and summarised to paint a picture of each applicant.
When you earn interest from a regular bank savings account, for example, the bank automatically deducts basic rate tax (currently 20%) before paying your interest. With interest earned from peer-to-peer lending, tax is not deducted automatically so lenders will need to declare their income to HMRC.
As 2018 draws to a close, with our bellies full of Christmas turkey, it's only natural to look back on the past 12 months and reflect. No doubt, it's been a turbulent one economically and politically, and not everyone has had it all their own way.