RateSetter: How the base rate affects P2P

Pete Behrens, co-founder and chief commercial officer at RateSetter, explains how P2P lenders can be indirectly tied to the Bank of England base rate…

Following seven years without change, on Thursday 9 August 2016 the Bank of England cut its official interest rate (often called the ‘base rate’) from 0.5 per cent to 0.25 per cent.

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

In August, it was reported that many banks promptly reduced the rates that they pay to depositors – in several cases by more than the 0.25 per cent reduction in the base rate.

We are often asked what a change in the Bank of England base rate means for peer-to-peer investors, so we’d like to shed some light on this from a RateSetter point of view.

The short answer is that the interest rates offered by peer-to-peer lending platforms are not directly tied to the base rate. A cut (or increase) in the base rate does not necessarily impact the rates available on peer-to-peer lending platforms.

But, here’s the bit that’s often forgotten: banks, for the most part, are not obliged to link their interest rates to the base rate either. Of course they can choose whether this should be should be an integral feature of their products – an example where this is explicitly the case is a tracker mortgage.

So banks actively decide whether to raise or lower interest rates on their products and by how much. P2P lending platforms also have a choice: they can set the interest rates they offer via a committee meeting, or allow rates to be determined by the marketplace of borrowers and investors, through supply of and demand for money.

Some P2P platforms have chosen to reduce returns for investors. However, in RateSetter’s market, the rates are set by supply and demand so they move up and down over time.

However, there’s a bit more to it than that. As a reduction in the Bank of England base rate leads to lower interest rates on bank deposits, this may prompt people to shop around to obtain a better interest rate.  Some people might choose to accept some risk in exchange for a higher return by investing via a peer-to-peer marketplace like RateSetter.

RateSetter is an open market, so if the supply of money from investors increases, all other things being equal, market interest rates on our platform would fall. Therefore, although we wouldn’t have changed anything, it’s possible that a base rate cut could indirectly influence market rates.

The bottom line is that RateSetter does not, and cannot, pass on changes in the base rate, and that’s where P2P lenders differ enormously from high street banks.