The Bank of England has cut interest rates - does this affect returns on RateSetter?

By Luke OMahony

On Thursday 9 August 2016, the Bank of England reduced its official interest rate – which is often referred to as the ‘base rate’ and is seen as a benchmark for interest rates in general – from 0.5% to 0.25%.

A reduction in the Bank of England base rate is generally passed on by high street banks to savers (in the form of lower returns paid on deposits) and borrowers (in the form of lower interest on loans).

Several banks have already reduced the rates that they pay to savers – in some cases by more than the 0.25% fall in the base rate. We are often asked what a change in Bank of England base rate would mean for the interest rates available via RateSetter, and we thought this would be a timely opportunity to comment. So, will RateSetter reduce interest rates for investors as a consequence of the Bank of England rate cut?

Short answer: no!

The short answer is no; the interest rates available through RateSetter are not tied to the rates offered by the Bank of England, and have not materially changed in the few days since the Bank of England base rate was cut.

However, there’s a little more to it than that: uniquely, in our market the rates are set by you, our customers – tens of thousands of investors and borrowers – not by committees or banks. That means that rates are set by the supply and demand of money from the investors and borrowers on our platform, and they are therefore dynamic and not fixed.

Longer answer: it could indirectly influence the supply of investment

A fall in the base rate will tend to result in lower interest rates on savings deposits. As a result, some people with money in savings accounts might decide to shop around to obtain a better interest rate, and it’s possible some might choose to accept some risk in order to earn a higher return on RateSetter, for example.

Because we’re an open market, if the supply of money from investors on our platform increases and nothing else changes, interest rates on our platform would fall. So although we wouldn’t have changed anything, it’s possible that a base rate cut could indirectly influence returns (and also therefore interest rates available to borrowers) on our platform.

In practice, based on limited data from the two weeks, RateSetter market rates have not decreased in line with the base rate as the graph below shows.

ratesetter interest rates and base rate

However, as already noted, this table is based on just two weeks' worth of data, and there are of course many other factors that affect the supply of and demand for money in the RateSetter market.

The bottom line is that we do not – and cannot – pass on changes in the Bank of England base rate, nor do we have committees that implement rate changes. The market rates at RateSetter are set by you.