The Bank of England today raised the base rate for the fifth consecutive month, bringing it to a 13-year high of 1.25 per cent.
The central bank follows in the steps of its US counterpart, the Federal Reserve, which also raised rates yesterday with a similar aim of trying to temper soaring inflation.
Impact on borrowers
Ross Gandy, UK managing director of peer-to-peer property lending platform EstateGuru, comments that “small- and medium-sized enterprises (SMEs) will be feeling the pressure”.
He notes that high street banks tend to tighten up their credit criteria in times of economic turbulence, which can rule out many small businesses.
“Thankfully, there are other options available to SMEs looking to secure funding,” he adds.
“Alternative lenders take a far more holistic approach to the underwriting process and deal with applications on a case by case basis, taking into account the individual needs of the applicant in the hopes of finding a solution that suits them best.”
The Federation of Small Businesses (FSB), an industry trade body, agrees that small firms will find it harder to access finance in the current environment.
“This latest rise illustrates something every small business owner will be acutely aware of: Rising costs are running out of control, and the operating environment for small firms is tougher than it has been for some time,” says FSB policy and advocacy chair Tina McKenzie.
“The increase will make access to finance for small firms more expensive. This makes announcing a successor to the Recovery Loans Scheme, which ends later this month, even more important.
“FSB figures show finance application approvals drying up, so banks must promote the new scheme in good faith. And if we see a credit crunch following, as we did in 2008, having a scheme like this from the British Business Bank already up and running could be crucial, to combat the recession and protect small businesses from going under through a lack of cash.”
Impact on savers
Savers should in theory be given a boost when interest rates rise, as banks and building societies are meant to pass on the base rate hike to their customers. However, this does not always happen in practice and such increases can be very slow to trickle through.
Despite today’s rate hike, the base rate is still far below the current rate of inflation of nine per cent, meaning that people will still be losing money on their cash savings in real terms.
“It’s difficult to predict how high rates are likely to go,” says Alice Guy, personal finance editor at Interactive Investor.
“It depends on how the economy and inflation reacts over the next few months. Most experts agree that further rate rises are likely and interest rates could climb as high as 2.5 per cent by 2023.
“However, we’re unlikely to see a return to the ultra-high interest rates of the 70s and 80s. That’s because those interest rates hikes followed a very long period of high inflation throughout the 1970s.
“In contrast, if economic forecasts are correct, the current period of inflation is likely to be fairly short-lived – at least, that’s what we all hope.”
The case for investing
Soaring inflation bolsters the case for investing, for those with a little extra money to spare.
Rather than allowing inflation to erode your savings, people with additional money to invest should consider peer-to-peer lending. Returns can vary, and no investment comes without risk, but there is the opportunity to partially or fully offset the impact of inflation on your portfolio.
There are a variety of products on the market, allowing retail investors to fund a range of business, consumer and property loans, which can often be held in an Innovative Finance ISA wrapper to enjoy tax-free returns.
For example, Folk2Folk offers typical returns of 6.5 per cent on secured property and business loans, while Kuflink investors can fund a variety of property loans to gain returns of up to 7.44 per cent.
Furthermore, P2P investing is a great way of diversifying your portfolio away from the stock market and is far less volatile.
Jatin Ondhia, chief executive of P2P property lending platform Shojin Property Partners, says that investors should rethink their strategies in economically turnbulent times.
“Given the current macroeconomic challenges, it is imperative that investors monitor how different markets and assets are faring, rethinking their strategies accordingly,” he says. “Diversification and agility could prove key in navigating this testing climate, and it should be expected that most resilient markets – such as real estate – will continue to attract investor demand, particularly among those seeking relatively safe options that stand a chance of keeping pace with inflation.”