THE BANK of England’s decision to increase the base rate is beneficial for peer-to-peer lending platforms, RateSetter has claimed.
At the start of August, the Bank raised its interest rate by 0.25 percentage points to 0.75 per cent, taking it above 0.5 per cent for the first time in nine years.
It is often assumed interest rate rises are a threat to P2P lenders because, in theory, they should make savings accounts more attractive.
However, John Battersby, spokesman for RateSetter, pointed out that banks often drag their feet in passing on interest rate increases to savers, or do not pass on the increase in full.
“By widening the difference between the rate they pay to savers and the rate they charge borrowers, banks can increase their margins and make more profit,” Battersby explained in a blog.
He claimed that, in contrast, RateSetter is narrowing the gap between what lenders earn and what borrowers pay.
“As a result, the wider the banks stretch this gap, the more RateSetter stands out,” he argued.
The Bank of England interest rate is set by its Monetary Policy Committee which meets eight times each year. Banks and building societies also have their own committees which agree rates for savers and borrowers, taking into account the margin that can be earned between the two.
In comparison, RateSetter’s interest rates are set by the supply of and demand for money in its market.
“So, when the Bank of England increases its interest rate, this is broadly what happens: the increase in the Bank of England interest rate leads to higher costs to borrow from banks and building societies. As a result, borrowers are more likely to look for a better deal and some could come to RateSetter,” Battersby said.
“When demand from borrowers increases, all other things being equal, interest rates in our market increase and this attracts more investors.”
RateSetter isn’t the only P2P lending platform to express confidence in base rate rises. Earlier this year, LendingWorks claimed tightening monetary policy means lenders will not have to offer such cheap funding to borrowers as a way to stay competitive.
This makes it highly likely that yields will increase for lenders, it said.
However, rising base rates also mean borrowers have to pay more in interest charges, which increase the risk of higher default rates, particularly in variable rate debt such as mortgages.