Direct lending and p2p lending news

Interest rates, inflation and the budget; so far November has been an interesting month for the UK economy. What impact could these have on our finances?

Interest rate rises to 0.5% - but still no good news for savers

November commenced with the Bank of England raising interest rates for the first time since 2007. Rates rose to 0.5%, an increase of 0.25% from the historical low introduced in August 2016. This was a long-awaited boost to savers who have seen few, if any, rays of light since the financial crisis a decade ago. However, according to research by consumer watchdogs, to date just one in seven banks have transferred interest rate benefits over to their savers. When Bank of England Governor Mark Carney announced the rise on 2nd November, he said:

“We do expect to see higher interest rates passed on to savers.”

Three weeks in and even those Banks who have made some concessions, few have passed on the full amount to their customers. Deputy Governor of the BOE, Sir John Cunliffe, noted that there were often delays between rate increases high street banks rolling out the changes – but he added:

"If I can get a better rate elsewhere I should do that. The Government has put a lot of effort into making it easier for bank accounts to move."

Conversely, banks and building societies have been far quicker to implement changes to their mortgage offerings. Over 20 banks have already announced increases to their SVR mortgages and most customers with tracker mortgages saw an immediate rise.

And what are the longer-term predictions for interest rates? The Bank of England thinks the UK economy is unlikely to reach pre-crisis growth rates any time soon, as reflected in Wednesday budget announcement where growth has been cut to 1.5% in 2018 against March’s forecast of 2%. The expectation is that there will be just two further interest rate increases over the next few years - 0.25% in 2018 and another 0.25% in 2020.

Inflation rises to 3% - ‘more of a threat than Brexit’

Against this backdrop of low interest rates, mid-November saw Inflation remain steady at 3% contrary to the Bank of England’s target 2%. Whilst uncertainty surrounding Brexit negotiations continue, so far, the stock market has been buoyant against a falling pound. The pound has been falling steadily since late 2015, with the biggest fall directly following the Brexit referendum in June 2016. Sterling’s decline in value has been one of the key contributing factors leading to the continued rise in inflation, which reached a five and a half year high in September 2017.

Inflation has a considerable impact on the value of wealth and the money in our pockets. Recent research from Rathbones investment management has discovered that investors consider low interest rates and rising inflation a bigger threat to their finances than the continued uncertainty surrounding Brexit. In terms of inflation, Rathbones comments:

“However, we believe inflation will remain stable over the long term and that multi-asset portfolios with equities as a core holding remain an appropriate investment approach….The forces driving inflation across the economy present additional opportunities for investors.”

The next inflation report is due on the 12th December 2017, with the commentators predicting that inflation will hit 3.2% before falling back to the target 2% over subsequent years.

“While the Bank of England raised interest rates at the beginning of this month given concerns over inflation, it will take some time for inflation to fall back nearer the 2% target...This means cash-strapped consumers will continue to feel the pinch as wages lag price rises." Maike Currie, Fidelity International

Autumn budget

There were no major surprises from yesterday’s budget, aside from the revised growth estimates and new measures to help tackle the housing crisis. Essentially, it was a case of business as usual.

Revised growth estimates

UK growth remains subdued as 2017 growth estimates were cut. March’s forecast of 2% has been revised down to 1.5%. Future growth has also been adjusted to 1.4% in 2018, 1.3% in 2019. Productivity growth was also revised down to an average of 0.7% a year until 2023.

Stamp duty and housing

“The government is determined to fix the dysfunctional housing market, and restore the dream of home ownership for a new generation…The only sustainable way to make housing more affordable over the long term is to build more homes in the right places.” Philip Hammond

Property focused Direct lending and P2P lenders welcomed yesterday’s housing measures. Stamp duty was abolished for all first-time buyers for home purchases up to the value of £300,000. Although saving up a deposit remains the key challenge for first time buyers, scrapping stamp duty for most first-time buyers should at least boost market activity.

In addition, with the aim of delivering 300,000 new homes a year by the mid 2020’s, a £44 billion housing package will be provided to support house-building over the next five years.

Personal finance, savings, and investments

The tax free personal income allowance will rise in line with inflation to 11,850 in April 2018 and the higher rate tax threshold will increase to £46,350.

Designed to stimulate growth in early stage businesses, investors using the EIS (Enterprise Investment Scheme) as a tax wrapper were pleasantly surprised to see a doubling of the investment limit. From April 2018 an individual investor will now be able to earn up to £600,000 in tax relief. However, scheme rules will be tightened so investors can’t use it for low risk assets.

The government side-stepped savers in this budget. Some commenters noted that the word ‘savers’ was completely omitted. The hoped for rise in the ISA allowance didn’t materialise, with the tax-free limit for 2018 – 2019 to remain frozen at £20,000.

Low interest rates, rising inflation, slowing economic growth and continued Brexit uncertainty

As the cost of living continues to rise and real incomes continue to fall a key concern for savers and investors will be how to manage their finances. Relief is unlikely to come via improved interest rates from savings accounts any time soon, so savers and investors will need to continue to hunt around for a better return on their cash. As Rathbones neatly summarised in their inflation report, ultimately it goes back to maintaining a well-balanced and diversified portfolio.

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