Invest & Fund warns on dangers of steep and rapid rate decline
As everyone waits to find out which direction interest rates will move in the first quarter of the year, Invest & Fund has warned that a steep and rapid rate decline could create a liquidity trap.
In a post on its website, the residential development lending platform said that if rates come down too fast there could be an explosion of retail and business borrowing, which could be counterproductive in battling inflation. In this case debt markets can also become less attractive.
Read more: Invest & Fund sees hints of market recovery
“We see a move to cash and other strategies at a time when we need a lot of national-level borrowing to refinance large swathes of the economy, stimulate business growth, and boost housing, so like everything in life, this will come down to balance,” the team wrote.
“The base rate situation could be considered a giant game of What’s the time, Mr Wolf? The creep back towards a manageable two per cent level of inflation must be gradual enough and quiet enough to avoid getting spotted or eaten by the bond market.”
Invest & Fund expects the overall cost of borrowing in the alternative lending market to come down from now. This will result in a pick-up in activity as potential borrowers that have been waiting on the sidelines enter the market. Meanwhile the focus will move from restructuring to growth.
Read more: Invest & Fund: There’s light at the end of the tunnel for housebuilding
The firm also expects an increase in support from the government for the development sector, particularly as political parties prepare for a General Election.
“We fully expect a lot of the red tape that’s had a substantial and costly impact, particularly on the SME sector serviced by the alternative finance sector, to begin to fall away,” the firm noted.
And finally, it believes that the volume of private sector and institutional investment into homebuilding to skyrocket.
“As rates come down and fire the starting gun on an era of intensive homebuilding in the UK, fully backed and supported on a state level out of sheer necessity, the opportunity for the custodians of significant wealth to bolster their returns is vast,” Invest & Fund added.
But how much of that will benefit peer-to-peer lenders remains to be seen.
Read more: Invest & Fund bolsters development finance team