Monday, 8 August 2016

Bank of England interest rate cuts: A TDX Group view

On 4 August, the Bank of England cut interest rates for the first time since 2009, from 0.5% to a record low of 0.25% and also announced the biggest cut to its growth forecasts since it began making them in 1983. These measures designed to stimulate the economy come off the back of uncertainty caused by the EU referendum result and downward pointing economic markers, like the Purchasing Managers’ Index (PMI). Most importantly, these cuts in interest rates will affect banks, savers, pensioners, the housing market, and ultimately touch every individual in the UK and further afield.

So, who will be the winners and losers as a result of this cut?
An interest rate cut is one lever the Bank of England can pull to attempt to rouse the UK economy, but the situation clearly creates winners and losers depending on an individual or a household’s financial circumstances. Mortgage-holders will see some benefit so long as they aren’t on a fixed rate. Savers and pension-holders will see a decline in their earnings as rates drop. Whilst most loan-holders and credit card debtors won’t see any changes as those rates tend to be fixed.

A turbulent economy creates uncertainty and an increase in the risk associated with it. So, if that is the case, it is likely that debt will become more of a focus for lenders and more to the point the servicing of that debt.

If all goes to plan the stimulus will fuel a consumer-led economy and signs of a healthier economic climate should become apparent. There are risks though. In the long term the low interest rates may tempt homebuyers to stretch themselves to buy, storing up an issue if rates rise again in the future.

The immediate risk is the falling Sterling rate and the impact that will have on the prices of goods and imports. There is likely to be more immediate hardship that will come from the inevitable price increases which will flow through to the consumer and impact their spending.

What does this mean for creditors?
It’s still a little too early to say. Both challenges and opportunities exist within an ever changing economy and how these are likely to play out depends on who you listen to or which article you read.

The underlying decline in Sterling will make goods imported into the UK more expensive ultimately driving up prices for consumers. This creates a risk around reduced disposable income to meet credit payment obligations and a longer term risk around the impact on mortgage repayments from interest rate rises to combat those growing prices.

The impact of increasing debt levels due to customers being unable to pay them down, the increasing levels of hardship and vulnerable customers and the increase in arrears will mean creditors really will have to get to know their customers and their behaviour in more detail.

They’ll have to look at their contact strategies, customer communications and perhaps take a longer term view to rehabilitation and repayment. A one size fits all approach will not be effective in a situation where many creditors are competing for the same debtor pound for repayments.

How can TDX Group help during this turbulent time?
Creditors need to get a head start on their competitors by better understanding their debt portfolio, the behavioural characteristics of individual customers and how best to compliantly collect on arrears. If you’re a creditor who would like to discuss the impact these changes could have on your collections and recoveries strategy please get in touch at my LinkedIn address below.

Richard Anderson is Head of Advisory at TDX Group

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