Bank of England to capital buffers and lower interest rates following Brexit
Mike Carney, the Bank of England’s governor has stated that interest rates will be cut this summer to battle a Brexit slowdown. Ten year government bond yields have dropped as well as the pound dropping against the dollar further. Both these changes occurred during the governor’s speech. He stated that we could be expecting the cost of borrowing to drop and that the “UK can handle change” and “it’s one of the most flexible economies in the world”. So what does this mean for the population and what changes are we likely to see in the world of alternative finance?
The governor has stated that “the Committee will make an initial assessment on 14 July, and a full assessment complete with a new forecast will follow in the August Inflation Report. In August, we will also discuss further the range of instruments at our disposal.” The governor thinks it will not be a question of whether or not the UK can handle change but more so “how quickly and well.” By cutting the cost of borrowing also, the BoE are looking to keep households and businesses calm during the economy change.
For alternative finance, this means that we are looking to see more competitive rates from the banks, but the real questions are, how much of a drop are we likely to see, and does this mean they will lend more? There needs to be more of a change than simply dropping interest rates. It means we are likely to continue to see alternative finance growth because, not only are providers lending, the rates are very competitive. If the BoE do not make a big enough cut in rates then it will not make a difference to bank lending.
However with interest rates at a record low of 0.5% for savings, lowering this could see rates sitting near 0%. This will likely cause savers and investors to shift elsewhere with their cash and look to use alternative finance for higher percentage rates when saving. With interest rates roughly around 8% when lending your money, you can see the clear attraction. However it’s important to remember that using peer to peer lending and alternative finance means your capital is at risk. Most lenders now have a provision fund to help cover and investments that could potentially be lost.
The BoE have responded quickly to post-Brexit effects in other ways also after stating the problems caused by voting leave are now becoming apparent. The capital required has been lowered by £5.7bn, which now allows banks to lend another £150bn to households and businesses.
The Bank of England has said:
“There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging.”
In order to fight of the UK’s financial stability dropping, the BoE have responded by making this call. This allows the banks to increase what they can lend by a huge figure and can allow them to be a lot more competitive when it comes to lending. Alongside the banks decision to cut interest rates, this could potentially make huge improvements from banks.
This of course will have an effect on alternative finance and the market in general. Could these decisions sway businesses bank to banks when it comes to lending? Reports have already showed us that over 90% of business owners turn to their bank first when looking for lending. So we know that even with the majority of people turning to their bank, alternative finance still has huge growth and development. The idea of this move is to keep the UK economy stable and to encourage banks to continue to keep lending and if not, lend more. The BoE are aiming to push banks to start lending more and helping the growth of UK businesses.
The governor however seems to think that the UK will continue on fine. He has said the BoE will look to inject billions into the EU economy to help keep things afloat and him and his colleagues will be going nowhere and will stand by their responsibilities to push the UK forward following Brexit. However, after Mr.Carneys comments on the leave campaign, some have suggested his decision may have been influenced by his previous employer, Goldman Sachs. Can we trust the governor on his comments and will the UK stay afloat as well as he believes? Only time can tell but in our world, the alternative finance world, we are still very much here, the crowd is here, lenders are ready to borrow and the market is in full swing. Being an extremely transparent and flexible market, alternative finance will be able to shift accordingly to post-Brexit effects.