COMMENT
Lenders are ready
in eastern Europe, we are going to have to consider that, like my inflation predic - tion of last year, there is a risk that this could fall some way short of the mark. I know the Bank of England has sug- gested that the Russian invasion may delay its rate rises, however, if inflation persists, it is bound to hike them in line with its mission to keep inflation under two per cent. The interest rate rises will come later, but they will still come. UK borrowers used to a long period of ultra-low interest rates, may be looking at a BBR of two per cent or more by the end of the year on top of all the other escalating costs. Two per cent may prove to be a worse case scenario, but whatever happens during the coming months, lenders are going to be moving into waters they have not navigated for the best part of twenty years. British borrowers have become used to stable rates of under 0.75 per cent. You have to go all the way back to 1988-90 and 2003-7 to find periods when interest rates increased sharply from a low base. Then - in line with all previous periods of higher and rising interest rates - many borrowers struggled as their monthly payments grew. Aggregate default rates rose. The cost to lenders varied accord- ing to the quality of the loan book and ability to handle the changing situation. For a few the rising adverse lending was fatal for profits, for others less so, but for all these were unsettling periods. This time around, thankfully, lenders small as well as large, are in a far better position to ride out the impact. Technology, undreamt of at the turn of the 21 st century, will allow them to weather such stress tests. Where ana- logue processes in the 1990s meant meaningful data was to all intents and purposes unobtainable, fintech suppli - ers such as LendingMetrics now mean that it is easily accessible and in an instant.
David Wylie, Commercial Director of LendingMetrics, says that unlike previous times of economic uncertainty, most providers of finance are well prepared for the impact of higher interest rates and cost- of-living increases When I wrote about rising inflation in these pages six months ago, little did I know that my prediction would appear to be somewhat on the low side. At the time, I saw prices rising to four per cent ‘or more by the second half of 2022’. Now, I can see that my ‘or more’ should have read ‘considerably more’. Even without the invasion of Ukraine, the UK was looking at inflation hitting six per cent by the Spring (source: Bank of England). Now that we have the long- feared Russian aggression, and what looks like the phasing out of European dependence on its energy, who knows
what the Consumer Price Index is going to be by the end of the year. Given the number of variables at play, even the most reliable of sources is going to find it difficult to predict. Most though would put money on it being a lot closer to ten per cent than is comfortable. For lenders, such a high inflation sce - nario should cause some concern. For, where inflation goes, interest rates invariably follow. And there is obviously a well-established link between higher interest rates, testing economic times, and the incidence of late payment and default, particularly for those with varia- ble rate finance. The further north the interest rate goes, the greater the level of grief for any lenders’ loan book. Financial markets were pricing-in four interest rate rises for 2022, taking the Bank Base Rate to 1.25 per cent by year end, before Ukraine. Given the conflict
22 | Metrics Monthly
Q2 | 2022
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