The Bank of England announced that it is reducing interest rates from 0.75% to 0.25% in hopes to combat the potential economic impact of the coronavirus, but what does this mean for business and consumers. With many consumers in fixed rate loans will they actually feel any of the benefits the bank of england are looking for…
Mark Walker, Editorial Director for The Fintech Times spoke to several people from different areas of the industry to understand the view from the lending industry.
Simon Cureton, CEO of Funding Options
“The Bank of England is right to make a swift decision to cut the base rate, rather than waiting until the end of March. It’s good news for small businesses, which may have felt the effects much more acutely had the Bank waited until the end of the month.
We are only at the very beginning of this health crisis, and the effects of COVID-19 on businesses are only just beginning to emerge. It is very likely that the worst is yet to come, and organisations large and small need to plan for every contingency. Many will need to take on extra financing to secure themselves against a downturn.
SMEs make up 99% of the UK’s businesses, and their survival is essential for the health of the overall UK economy. Offering access to cheaper finance and payment holidays where necessary will help ensure their longevity, and make it easier for entrepreneurs who rely on their businesses to pay mortgages, support families, and save for retirement.
At Funding Options we’ve seen an increase in enquires for working capital finance, and our lending partners will be using this additional funding from the BoE to help businesses through the downturn caused by COVID-19. During this crisis, we must all work together to keep the UK’s economy moving forward, and the lending space has a vital role to play in supporting those that need a little extra flexibility.”
Stuart Law, CEO at Assetz Capital
“The country desperately needs economic stimulation, so the Bank of England should be praised for acting now. However, it takes time for rate cuts to stimulate the economy, and the man or woman on the street will immediately feel the impact in lower bank savings rates and stocks prices.
“The fixed rates offered by peer to peer lenders like us are not directly affected by rate cuts, so we expect more people to opt for peer to peer investments in the near future.”
Rhydian Lewis, CEO of RateSetter
“The Bank of England has made the right call to support the economy at this difficult time. However, millions of savers will be nervously anticipating the interest rates on their cash to be cut to zero. With this year’s ISA deadline just around the corner and equities extremely volatile, more people than ever will now be looking for alternatives that perform steadily in order to keep their money earning.”
New research from pricing strategy specialists Simon-Kucher (www.simon-kucher.com) shows that as a result of the Bank of England’s 50bps base rate cut, the big losers will be savers and businesses with surplus liquidity in the form of bank deposits, and the banks themselves, which stand to lose £2.0bn in annual profits.
Hrishi Rajadhyaksha, a director with the Financial Services practice at Simon-Kucher, notes: “The rate cut of 0.50% will likely see the top ten UK lenders losing £2.0bn in annual pre-tax profits from lower net interest income, as well as being bad news for savers and businesses with funds on deposit. Of course, bad news for the banks’ profits is bad news for the millions of people who own them, whether directly through shares or indirectly through their pension funds. By contrast, people with large variable mortgages will be clear winners.
“We expect to see banks pass on rate cuts on their savings back books right away wherever possible. Savers with instant access deposits and corporates will feel the reduction immediately, although many interest rates are so low they may barely notice: currently someone with £20,000 of savings will lose just £40 a year from the change because they are currently earning the somewhat measly sum of £100 per year interest on it.”
Key findings from Simon-Kucher’s analysis include:
A rate cut of 0.50% would cause the top ten UK lenders to lose £2.0bn in annual pre-tax profits, an impact of about 12% compared with 2019 estimates. This is driven by a £7.0bn loss in interest income, partly offset by a £2.0bn reduction in funding costs, as a result of the rate cut. For context, their total half year pre-tax profits in the first half of 2019 were £8.1bn, translating to a rough expectation of £16.2bn annually. This is represented by an expected drop in average NIM weighted by total assets of approx. 14bps. {Net interest margin (NIM) is a key measure for banks of the difference between the interest income generated through interest and the amount of interest paid out (for example, deposits), relative to the amount of their (interest-earning) assets}
Banks with a larger share of instant access, personal deposits and corporate deposits, will fare better than others in the short run. This is because these banks will be more able to pass on the rate cut to these accounts. By contrast, fixed-term personal savings accounts will only face lower average rates only in the long run as customers roll off their current rate, or new customers join. Banks like RBS and Barclays that are weighted towards more non-interest bearing deposits, will find it harder to pass on any impact of the rate cut.
Businesses with money on deposit will be losers, particularly as there is often a greater willingness to pass on lower interest rates through to corporate deposits than on personal deposits. Banks with a higher proportion of corporate deposits include Barclays and HSBC.
Simon-Kucher expects the cut would cause personal instant access savings accounts to offer rates on average 0.2% less than current levels. A person with £20,000 of savings will currently earn only £100 (based on a typical instant access deposit account). Simon-Kucher expects they will now earn just £60 a year.
Simon-Kucher expects the cut to also cause residential mortgage rates to decrease on average by 0.38% less than current levels. A first-time buyer borrowing £150,000 with a £50,000 deposit (and a 75% loan to value) can expect their monthly payments to go down by roughly £28 (£336 annually).
Our research in countries with an even lower interest rate environment (including those with negative rates, such as Germany and Switzerland) suggests an increased appetite for moving bank deposits to investments when rates stay low for extended periods. There is an opportunity for banks with strong investment offerings to channel customers towards their investment arms. Halifax (a subsidiary of Lloyds), Barclays, and Santander have notably strong investment propositions.
