Financial solutions company Think Money have said that borrowers and homeowners stand to gain from the Bank of England’s potential measures to tackle the economic crisis, but warned that tighter lending criteria may remain in place to avoid any repeat of the past year’s trouble in the loan markets.

According to The Telegraph, two leading economists have said that the Bank of England may need to cut base rates to as little as 2% or even 1% in order to tackle the forthcoming economic crisis. That would make the base rate its lowest since the Bank of England was established in 1694.

Roger Bootle, managing director of Capital Economics and a former Treasury adviser, said: “It is critical to get rates lower – if the medicine is not working you have to use a stronger dose,” he said. “[The Bank] needs to get rates down far and fast.

“They need to be pretty bold. The lowest rates have ever gone is two per cent. They could easily go lower than that now – why not? After all, the Federal Reserve dropped [US] rates to one per cent.”

Meanwhile, Alan Clarke of BNP Paribas said that he expects the base rate to reach 2.5%, although it might be even lower. “One per cent or lower is not impossible,” he added. “The important trigger is the labour market: unemployment over, say, eight per cent would be a disaster.”

Although a base rate cut would theoretically help to lower interest rates on loans, a spokesperson for Think Money said that the situation is not always that clear-cut.

“Any drop in the base rate potentially makes loans cheaper, because it reduces the amount of interest the lenders have to pay the Bank of England for borrowing the necessary funds,” she said. “Therefore, lenders can offer loans to consumers at a lower rate while still making a similar profit.

“However, the main obstacle to that is LIBOR (London Inter-Bank Offered Rate), a measure of the rate at which banks are lending to each other. Ordinarily this shouldn’t be too different to the base rate, but currently it’s almost 2% higher – which means that some funds for loans and mortgages are still quite expensive to lenders.

“Drops in the base rate can encourage a lower LIBOR, but currently the uncertainty in the loans market is keeping the rate high, as well as prompting lenders to maintain their tight lending criteria. Both of these need to ease up before the loans market can return to normal – which is why extreme base rate drops to only 1% or 2% might be needed.”

The Think Money spokesperson added that lending criteria is unlikely to ease to allow anywhere near the levels of lending seen during the economic boom. “Lenders will feel they have learnt their lesson from the economic crisis and will look to protect their loans business by keeping their lending criteria high.

“It’s possible that we could see numbers of secured loans return to near-normal levels, since the collateral attached to secured loans makes them a ‘safer’ type of loan from the lender’s point of view. But in terms of unsecured loans, credit cards, overdrafts etc., lenders will probably continue to pay close attention to borrowers’ credit history.”

But the spokesperson was also keen to emphasise that loans are still very much available, and the availability will only increase as the market recovers. “Some people assume that loans simply aren’t available anymore, but that’s not the case – it can just take a little longer to find the right deal.”

Via EPR Network
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Financial solutions company Think Money (http://www.thinkmoney.com) have welcomed calls for energy providers to reconsider their prices following the Consumer Focus Energy Supply Probe’s findings about the industry, and added that many energy customers pushed towards debt by the rapid rises in energy prices stood to benefit from any agreement to reduce prices.

In their Energy Supply Probe, Consumer Focus, the new watchdog comprising Energywatch and the National Consumer Council, have called for “immediate action from energy companies to reduce their prices in line with falling oil prices”, adding: “This will be good not just for consumers, but for the whole economy.”

It is currently estimated by Consumer Focus that around 5 million British households are in fuel poverty – in which households spend 10% or more of their total income on domestic energy – with increasing numbers of people feeling the pressure of sharp rises in the prices of electricity and gas over the past year.

Wholesale oil prices have seen a huge drop in little over three months, down from around $147 per barrel in July to the current price of $66 per barrel. Drivers have experienced the benefits almost immediately, with the lowest unleaded petrol prices at 99.8 pence per litre at the time of writing, while airline’s fuel surcharges have also been cut, according to the BBC.

But prices of gas and electricity, which are traditionally closely linked with prices of oil, have shown no such reduction in prices – leaving many consumers “wondering why they are left waiting”, in the words of Consumer Focus chief executive Ed Mayo.

According to Consumer Focus, gas prices have risen by 51% since the start of the year, while electricity bills are up by 28% – meaning the average annual household energy bill stands at £1,308.

A spokesperson for Think Money said: “The existence of the Energy Supply Probe is of great reassurance to the millions of billpayers who have been hit with severe rises in energy prices over the past year, particularly those facing debt problems.

“There has been some justification for the price rises – oil prices stood at $147 per barrel in July, and wholesale gas has also experienced massive rises – but with oil now standing at less than $67 per barrel, and with petrol prices coming down, it’s unclear why domestic energy prices have not also come down.

“Billpayers will hope that the Energy Supply Probe, combined with Consumer Focus’ calls for immediate price reductions, will be enough to ensure that their bills become much less of a burden in the coming months.”

But the Think Money spokesperson added that the potential for forthcoming price reductions did not make existing debt an any less serious issue.

“We have seen increasing numbers of people pushed into debt by rising energy bills over the past few months. Because energy is an essential cost, those people with low incomes have been unavoidably hit hard by energy price rises, and many are finding that they can no longer afford to pay their bills.

“The problem is made worse by higher levels of unemployment, and a lot of people who previously had no trouble paying their bills are finding that they are getting into debt because they simply don’t have the spare income.

“We advise anyone struggling with debt to tackle the issue head-on and seek expert debt advice as soon as possible.”

Via EPR Network
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