At the start of August, the Bank of England raised its interest rate by 0.25 percentage points to 0.75%, taking it above 0.5% for the first time in 9 years. With the Bank’s ratesetters setting expectations for further increases in the future, albeit at “a gradual pace and to a limited extent”, we wanted to return to the topic of what changes in the Bank’s ‘base rate’ mean for the RateSetter market.
The Bank of England’s interest rate increase should be good news for savers, who have endured a decade of pitiful returns on their bank deposits. However, it is not unusual for banks to drag their feet in passing on Bank of England interest rate increases to savers, or not pass on the increase in full (related to this, the financial regulator is considering forcing banks to pay a minimum interest rate to stop them taking “advantage of high levels of customer inaction” – i.e. savers who do not shop around for a higher rate).
Even though the rate increase was widely anticipated, following the Bank of England’s announcement The Daily Mail reported that banks were increasing interest rates for borrowers but not for savers. This was followed a few days later by The Times which revealed that just 1 in 100 banks had passed the increase on to savers - yet many of the largest banks were quickly passing the increase on to their variable rate mortgage customers.
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.
We are often asked what Bank of England interest rate changes mean for our model. Some people assume that interest rate rises are a threat to RateSetter, but as AltFi wrote recently, rising interest rates are actually good news for RateSetter and other peer-to-peer platforms.
As noted earlier, banks can make greater profits when they widen the gap between what lenders (or savers in the case of the banks) earn and what borrowers pay. RateSetter on the other hand is narrowing this gap and delivering greater value to our customers. As a result, the wider the banks stretch this gap, the more RateSetter stands out.
The Bank of England interest rate is set by its Monetary Policy Committee which meets 8 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.
RateSetter is completely different. Our interest rates are not set by a committee but by the supply of and demand for money in our market. We are committed to this model and it will always be a key feature of RateSetter.
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. When demand from borrowers increases, all other things being equal, interest rates in our market increase and this attracts more investors. So the market rate finds a new equilibrium.
Banks aim to hold your cash safely, but they do not try to protect it from declining in purchasing power. RateSetter aims to deliver value to investors who are prepared to accept some risk in exchange for healthy returns. We believe that our focus on delivering value will mean that as and when the Bank of England gradually increases its interest rate, RateSetter will continue to deliver a premium over the bank rate for investors.