Base rate ‘complacency’ threatens debtor affordability
Base rate. Debt Collection agency Leicester
Photo Credit: bhautikjoshi via Compfight cc

 

Something few of us have given much thought to over the past five years is soon to become a headline issue – at least in the financial pages – once again.

 

 

The Bank of England base rate, set by the Monetary Policy Committee as a reference rate for banks and other lenders to set their own interest rates against, sits at a historical low of just 0.5%.

 

It reached that level in March 2009 after a series of rapid and relatively sizeable reductions from its previous high of 5.75% in November 2007.

 

With a typical rate change of just 0.25 percentage points – or no change at all – in a ‘normal’ monthly decision, a swing of 5.25% in just 16 months is indicative of the impact of the credit crunch and the recession that followed.

 

But just as slashing the rate was beneficial to debtors (and to the detriment of savers), when the base rate begins to rise again it is likely to increase either the outgoings or the total debt of individuals and organisations who rely heavily on credit.

 

Gavin Kelly, chief executive of the Resolution Foundation, says: “Successfully managing the adjustment to a world of more normal interest rates will be one of the key tests for the next government. The time to start acting is right now.”

 

Economists are uncertain of when the base rate will begin to rise again, but historical voting patterns suggest it is more likely to occur in a month when the quarterly Inflation Report is published – either February, May, August or November.

 

In the latest decision, August 2014, the MPC once again voted to hold the rate at 0.5%; however, many economists now expect to see the first upward move made within the coming six months.

 

For businesses, the challenge is to prepare now to protect against exposure to rising debt levels in the months ahead – both as a debtor and as a creditor.

 

With many individuals and business clients alike predicted to see their debt-related costs rising by early 2015, a sensible proactive approach would be to start limiting customers’ approved credit in advance, in anticipation of the greater costs to come.

 

Comprehensive credit checks – on both individuals and businesses – are therefore more important than ever to make sure not only that bad debts are not a problem in the short term, but that your cash flow does not get caught up in the problems a rising base rate may cause over the next year and beyond.

 

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