ArchOver’s Angus Dent warns that savers are unlikely to benefit from the latest interest rate hike, although it is step in the right direction for the Bank of England. Read the full article here.
Tag: interest rate
France
There was a time, not so long ago, when having some cash in the bank earning a reasonable level of interest was considered quite a smart thing to be doing, particularly since you could be pretty certain that your capital was safe. But that was before the 2008 financial crisis and interest rates fell through the floor – not just in the UK, but globally. Your money remains in a secure place, but you are likely to be earning next to nothing in real terms.
The problem is so severe in some parts of the world – Japan, for example – that you have to pay a bank to look after your cash because interest rates are negative. Closer to home, in France, where the equivalent to what we call Base Rate is 0%, the very best rate of interest you can hope to receive on your savings is 1.75%; or 0.75% if you want to retain reasonable access to your money.
If you take into account the fact that inflation in France is running at around 0.6% – not too bad, in European terms – it means that de facto savers are earning zilch. And if you factor in that their powerful neighbours, Germany, on which France depends for so much of its trade exports, have inflation running at 1.7%, it is inevitable that some of that inflation will be imported, reducing the actual return to less than zilch.
It would not take a massive leap of imagination to see that inflationary pressures are likely to increase, particularly if members of OPEC decide to restrict oil production and the global price goes through the roof as a result. To add to the gloomy outlook you have Marine Le Pen threatening to destabilise the whole political scene in France, with some commentators already speculating about the possibility of ‘FREXIT’.
All in all, it is probably not a great time to be sitting on a pile of cash in France, particularly if you rely on the interest generated to supplement your income. But if, as a French citizen, you cast your eyes across the English Channel you will see straight away that, because of the fall in the value of sterling since Brexit, investments in the UK are c12% cheaper than they were, say, six months ago. You will also see that returns of 6% or more, combined with reasonable security, are freely available through P2P loans. And if you look at ArchOver’s ‘Secured and Insured’ proposition – made possible with the help of Coface, an established French institution – you might just see the answer to your prayers. Let us hope so.
Product or Service?
The CEO of the FCA, Andrew Bailey’s, comments to the House of Commons’ Treasury Committee when questioned by Chris Philp MP, have given rise to some comment and a very good open letter from Christine Farnish, Independent Chair of the Peer-to-Peer Finance Association. The discussion so far is one of detail. It seems to me that before we get to the detail we should consider the principles involved.
Usually banks, correctly in my opinion, describe what they provide as products. We as consumers buy a product, say a deposit account paying 0.5% interest pa. We have no idea what the bank does with the money, that’s not our concern; we have our 0.5% return. Which given the doctrine of ‘too big to fail’ is correctly almost the risk free rate of return……a few Italian readers may disagree. No further information is required.
On the other hand P2P lenders provide a service to their lenders (and borrowers). We bring the opportunity for lenders to earn a on their money than is available with a bank product. We should make it clear how much security the lender will have and leave it to the lender to make a judgement on whether or not the trade off between security and return suits them.
Of course this begs the question how much is sufficient service; another judgement call. Most of the platforms will, correctly in my view, provide credit analysis on the potential borrower. It is for the lender to assess whether the platform’s systems of credit analysis are sufficient for their purposes. The platforms must, and do, publish their systems of credit analysis. Too few, again my judgement, of the platforms provide a sufficient monitoring service after the loans have been made (perhaps this is driven by the upfront fee model, as Chris Philp suggests). The platforms should provide sufficient information on the potential borrower, or class of borrower, to allow the lender to make a judgement on whether to lend. To my knowledge all of the platforms work hard at this provision and are regularly increasing the amount and scope of the information provided. Regretfully, as with all markets, there will never be a perfect provision of information.
It is for the potential lender to judge whether the information provided is sufficient. If they don’t find it sufficient then they’ll leave their money with the banks product. The decision is always with the lender. After all it is the lenders capital that is at risk, this must always be made clear.
Accepting the principal that the banks provide a product and the P2P lenders a service is the first step in accepting that the P2P lenders need only a small amount of capital, when compared to a bank. The capital required by the P2P is sufficient to allow the P2P, in a calamitous financial position, to transfer information under its living will to another nominated party to monitor all loans facilitated to repayment. This is, of course, exactly what the FCA require of us.
Productivity, Interest Rates and SMEs
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Last week, the Office for National Statistics (ONS) announced that productivity in the UK grew at the fastest rate in four years, finally exceeding the pre-economic crisis levels of 2007. A rise in productivity is significant because it is seen as a crucial measure of an economy’s strength and future GDP growth, taking in to account living standards, capital and labour resources. For too long the UK has lagged behind the other G7 countries in terms of productivity: this looks set to continue despite the good news, as gains in productivity are offset by persisting low confidence in UK manufacturing. The incoming UK minimum wage hike will also have a marked effect on productivity as labour hours will cost businesses more.
So what is the effect of macroeconomic productivity on small businesses? Productivity is a key measure that the Bank of England uses to determine interest rates, which are currently kept at record lows. There has been a huge amount of speculation as to when the interest rates will be increased and this news should support those who think a rate hike will be sooner rather than later. Small businesses looking to borrow money will be amongst those monitoring the situation, particularly those with loans with a variable rate. However, the Bank of England typically follows the lead of the US Federal Reserve when altering the interest rates, and it is hard to see any great change any time soon. In the current uncertain global financial and geopolitical climate, analysts are not predicting the first rate rise until spring next year. When that does happen, Mark Carney, the Bank of England’s governor, has stated that increases will be “limited and gradual”. Any changes will take time to filter through to the real economy and SMEs in particular.
A raise in productivity is undoubtedly a good sign the UK economy is finally dragging itself out of the doldrums, yet we are still 18% worse than we would have been if the pre-crisis productivity rates had been maintained. It is not just a case of everyone working a bit harder; investment in public infrastructure and fiscal policy will be the defining factors that will hopefully see the UK catching up with everybody else. Small businesses can expect to benefit from increased productivity and subsequent better living standards for its workers, but should be carefully monitoring an imminent interest rate hike when budgeting for the next couple of years.