What goes down... Are consumers prepared for an interest rate rise?
PUBLISHED: 12:01 02 November 2017 | UPDATED: 15:34 02 November 2017
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Consumer borrowing is growing at 10% a year and inflation has hit 3%, meaning that the Bank of England's decision on interest rates was the most eagerly-anticipated for years. BETHANY WHYMARK explores the potential impact on savers and borrowers.
For years, the monthly meeting of the Bank of England’s Monetary Policy Committee has been of little interest to those outside the circles of high finance.
But today’s widely-anticipated decision by the nine members of that committee to rise interest rates for the first time since July 2007, from 0.25% to 0.5%, will be have repercussions for the country’s savers and borrowers alike.
Those at the front-line of East Anglia’s debt problems have warned the rise will turn up the pressure on those struggling to get by, who are already grappling with the pressures of inflation pushing up their monthly bills.
Many millions of people have never known an interest-rate rise, and grown used to the availability of cheap money and benign mortgage rates.
While a handful of quarter-point rate rises over the next 18 months are likely to have little impact on those with credit card debts, mortgages or savings, raising the base rate too quickly could upset the finely-balanced apple cart – especially at a time when consumer borrowing is rising by around 10% year-on-year.
Bank of England statistics show consumer credit breached £204bn in September, while credit card borrowing was up by more than 40% on the previous month.
Meanwhile research by restructuring and insolvency trade body R3 has revealed 37% of adults in the East of England are worried about their current level of debt – with nearly half (47%) of those who are worried citing credit card repayments as the cause of their concerns.
Almost a third (30%) said they were struggling between pay days.
Mike Lamb, of King’s Money Advice, said a rate rise would simply add to the pressures on already squeezed households.
The volunteer-run service has helped 180 people and handled more than £1.6m of debt since starting up five years ago, working out affordable repayment arrangements with creditors.
Over the years Mr Lamb said the Norwich-based service had seen an increase in the number of people seeking help with debt which stemmed from a “slow deterioration” of their situation.
“At first it was people in crisis, who had lost their job or had a relationship break down. Now we are seeing more people who have been struggling for a long time and it has got to the point where they cannot manage,” he said.
“If you are having a crisis you can recover from it, but if you are struggling while in work, just bumping along the bottom, it is difficult to see how that is going to change.”
The proportion of Norfolk Citizens Advice clients with debt problems is around 40%, but this number is on the rise.
David Potten, acting chief executive of Norfolk Citizens Advice, believes the rate rise will be “significant”.
“If rates, particularly on things like credit cards and pay day loans, start to increase it is going to exacerbate people’s problems,” he said.
He added that the phasing-in of universal credit – with claimants often waiting eight weeks for their first payment – was an “important phenomenon”. “We find many people wait 10 to 12 weeks. Most people do not have 10 weeks’ money saved up.”
Savings and loans organisation Norwich Credit Union, which offers a 1.5% interest rate on its standard loan, said it had recently seen an influx of applications for membership.
Currently only around a quarter of members hold loans with the organisation, for which you must have some savings banked.
Jason Butler, a director at wealth management firm NW Brown, said the Bank of England’s increasingly “hawkish” behaviour meant markets were expecting a rise, but that a “baby steps” approach was needed to avoid making major waves.
“Going forward the issue the bank has is that it cannot push rates up too high because the consumer is fairly indebted and cannot take too many rises,” he said.
“Rates have been at record lows since the financial crisis and it has been very cheap to take on debt.”
This “cheapness of debt” – combined with the high proportion of British homeowners on non-fixed rate mortgages – means consumers are more “exposed” to rate hikes, Mr Butler said.
Matthew Peek, head of small and medium enterprise (SME) banking for Anglia at Barclays, said the length of time interest rates had been depressed could make consumers and businesses “complacent”.
“When you look back in time debt is relatively cheap compared to where businesses have been in past and they have proven for generations as long as they budget accordingly and forecast correctly and keep an eye on expenditure we do not need to worry yet.
“Since the financial crisis there has been a real move towards prudence, for businesses to save and have cash deposits and reserves. With a rate rise, businesses with money can expect a slightly better return.”
While warning of the danger of considering the base rate “in isolation”, Mr Peek said there were benefits to be gleaned from it, including easing pressure on increasing pay and a possible boost to sterling.
He added: “Businesses must not use this as a reason to stop what they are doing, when a vast majority of business people in the East are running profitably businesses. They need to keep the momentum up.”
Crunching the numbers
Credit card borrowing increased for the first time in five months in September, according to new statistics from the Bank of England.
Consumers borrowed £641m on credit cards in the month, up from £436m in August. It was the first time the monthly amount borrowed had risen since April, and the highest monthly increase in more than a year.
The month saw a total increase in consumer borrowing of £1.6bn.
The bank’s figures showed total consumer credit hit £204.2bn in September, up 9.9% over the previous 12 months.
The Financial Conduct Authority (FCA) warned in September that almost half of all UK adults were “financially vulnerable” and reliant on credit to make ends meet, while eight million people are struggling with debt.
This week Citizens Advice called on the FCA to take action to help people struggling to repay their debts, inciting the regulator and credit card companies to curb the rise of consumer debt by enforcing more responsible lending.
While businesses will also feel the pinch of an interest-rate rise, recent changes in company behaviour could mitigate the impact, a small business advice expert has speculated.
Matthew Peek, head of SME banking for Anglia at Barclays, said around half of all SMEs are now “permanent non-borrowers”, relying on reserves for investment and therefore escaping interest on business loans. However, this means half of firms are still borrowing, he said.
“When a commodity becomes relatively cheap it can make you complacent. It is a good idea to look at the lines of the business and see where you can cover your costs.
“It is rather relative. For every £100,000 a business is borrowing now – a reasonable figure for an SME – if the base rate rose by 0.25% the increase in cost would be less than £5 per week.”
He added: “There have been times when businesses have survived and thrived with much higher interest rates.”