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Peer2Peer Finance News | November 21, 2017

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RateSetter: BoE rate hike will have limited benefits for savers

RateSetter: BoE rate hike will have limited benefits for savers
Suzie Neuwirth

RATESETTER has said that a forecast interest rate rise on Thursday would have limited positive effects on savers and moved to reassure investors that its business model would thrive in a higher interest rate environment.

The ‘big three’ peer-to-peer lender said that an increase to the base rate from its historic low of 0.25 per cent would be “a sign of confidence in the strength of the economy and a step towards a more ‘normal’ interest rate environment”.

However, the company noted that banks traditionally do not pass on interest rate increases to savers, and even if they did, any impact would be negated by inflation.

Read more: RateSetter-backed report proposes reforms to end “cash bias”

“It should be welcome news for the millions of savers across the UK if the banks part with tradition and pass the increase on to savers quickly and in full…But banks are not obliged to pass on changes in the base rate,” RateSetter said in a blog post on its website on Tuesday.

“In fact, by widening the spread between the interest rate that they give to savers and what they charge for borrowers, banks traditionally increase their margins as interest rates rise.

“While – if it is passed on to savers – an interest rate increase would be seen as a positive step, we know that its impact would likely be limited: savers will continue to see the returns on their bank accounts entirely eaten up by inflation.”

Read more: RateSetter: Even a millionaire could no longer live off savings interest

The P2P lender went on to say that its interest rates are set by supply and demand, unlike the Bank of England and high street banks where rates are decided by committees.

“RateSetter also narrows the gap between what lenders earn and what borrowers pay,” it added. “The wider the banks make the gap between these two, the more opportunity there is for RateSetter to stand out by providing greater value to our customers.”

The Bank of England is expected to raise rates for the first time since 2007 this week, despite relatively weak economic growth over the past 12 months. Inflation is at a five-year high of three per cent, far above the Bank’s two per cent target, which has bolstered the case for a rate hike.

Read more: Four in 10 Brits shunning savings, RateSetter warns