Happy Birthday, 0.5% Interest Rates

It’s the five year anniversary of record low interest rates this week and the world is a very different place for many of us now than when the decision was first made in 2009. Peer-to-business lending in its recognised form didn’t exist for one.

Whether you believe the economy is now more sustainable than before or not, financial services providers clearly think the worst is over and believe there is an opportunity to capitalise on the recovery.

This week Moneysupermarket reported that credit card APRs are at their highest average rates since 2001 at 18.17 per cent, while fixed rate and tracker mortgage rates have crept up since last year even, in anticipation of a rate rise and in recognition of easing conditions for consumers.

All this should mean good news for businesses, as it indicates consumers have been spending again.

Exactly when the rate rise happens isn’t clear after the Bank of England moved the goalposts from unemployment targets to spare capacity. One certainty of a rate rise though is that banks will pass the immediate cost on to their borrowers and delay the increase in rates owed to savers.

We’re quite often asked if our market will continue to thrive in a higher interest rate environment, but the delay in passing on rate rise advantages by banks is one of the reasons we’re confident that peer-to-business lending will take all this in its stride.

It’s true that the market grew from dissatisfied savers and frustrated business borrowers, but the other advantages that have emerged have put the industry in an even stronger position.

Businesses don’t have to fill out mountains of paperwork to apply for a loan, the whole process takes weeks not months and they don’t get charged to repay a loan early.

One of the few remaining strengths for the banks in the business loan market is the preferential rate they can offer a handful of businesses. If the base rate rises, how will the banks compete in the SME market?

For individuals, does a 0.5 per cent rise mean their savings will immediately start to be great value? Probably not. Our own research found savers looking for a three year cash ISA now would have to take a hit of 41 per cent on the rates available three years ago. So there’s some way to go for rates to rise to offer something meaningful to savers.

While there’s still great relevance attached to the base rate in some markets, peer-to-business lending will continue to operate in the same way if it can retain the same efficiencies that have allowed it to prosper so far.

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