Rising inflation and falling saving rates present new opportunity for P2P

Inflation has risen to 1.8 per cent, while savings rates are being cut, heaping further pressure on savers and opening up new opportunities for peer-to-peer lending.

Yesterday, the Bank of England announced that inflation had risen to a six-month high of 1.8 per cent, while some analysts have predicted that it will surge to two per cent before the end of the year. This would have a knock-on effect on the value of any cash savings, meaning that savers who are earning less than two per cent interest on their money would end the year at a loss.

“Inflation has been muted for much of the past decade but [the] unexpected rise to 1.8 per cent could be the start of a sustained move upwards, especially as there are factors such as the increase in the minimum wage still to come this year,” said Adrian Lowcock, head of personal investing at investment platform Willis Owen.

“Indeed, it could well rise back to its long-term target of two per cent this year.

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“Even low inflation can seriously damage your wealth. For example, when it hits three per cent, inflation can halve the value of your savings over a 23-year period. This is the reason that beating inflation should be a core target for any investor, as in doing so you maintain the purchasing power of your savings.”

At the same time, a slew of banks and building societies have cut the rates on their cash savings accounts. Post Office Money has reduced its easy access account by 0.02 per cent, meaning that it now offers just 1.3 per cent per annum.

And according to analysis by Moneyfacts, over the past two years the number of deals able to outpace inflation has fallen dramatically month-on-month. In February 2018, 331 instant-access and fixed-rate savings accounts offered 1.3 per cent (the then-rate of inflation) or more, but today just 21 accounts can beat the 1.8 per cent rate of inflation. This has left savers at a disadvantage where they are forced to opt for longer-term fixed rate accounts which do not benefit from ease of access.

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“Savings rates have continued on the downward spiral this month, as a lack of competition takes its toll,” said Rachel Springall, finance expert at Moneyfacts.

“The top one-year fixed rate bond in the market now pays 0.15 per cent less than last month while the top five-year rate pays 0.40 per cent less.

“A year ago, savers would have found a top one-year fixed bond paying 2.15 per cent, but today not even the top five-year fixed rate bond will pay this return. This could dishearten savers who may be coming off a one-year fixed bond and are searching for an equivalent rate over a similar term.

“The latest inflation announcement may not be of concern to some savers looking to outpace its impact as it is below target, but it is expected to rise to 2.2 per cent by Q4 2022. As it stands, there is not one fixed rate bond that can beat this rate.”

However, P2P lenders could benefit from the lack of competition in the savings market, by offering lower-risk, relatively liquid lending products, just as long as the risks are fully explained to investors.

At the time of writing, every single P2P platform was targeting inflation-beating returns, often within an Innovative Finance ISA wrapper. As ISA season approaches, the convergence of falling saving rates and rising inflation may present new opportunities for both P2P platforms and disillusioned savers.

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