British Government Warns Against Profiteering, Banks Accused of Exorbitant Rates

• UK Government shows commitment to take strict actions against unfair pricing by shops during COVID-19 crisis

Prime Minister Boris Johnson has warned traders against profiteering from the coronavirus crisis. In the daily press conference, the Prime Minister made it clear that the shops would have to face financial penalties or legal action if they are found unfairly hiking prices on essential items, exploiting people’s need at a critical time.

It comes amid concerns that some businesses were trying to cash in at the time of national emergency by charging considerably higher prices for essential goods like groceries, vegetables, health and hygiene products (ex-toilet papers), etc.

Mr Johnson stated that the watchdog Competition and Markets Authority (CMA) is equipped with various discretionary powers that can be used to keep a tab on unfair price hikes. The government also continues to look if the statutory mode is needed to go further in the interest of the nation and its people.

Downing Street had earlier signalled that if the CMA’s powers prove insufficient and traders continue with excessive price increases during the outbreak coronavirus, then it will be using its powers to curb the practice. Mr Johnson further said that ‘the government is indeed looking very carefully at what is going on.’

• Major Banks accused of charging exorbitant rates despite the base rate set at an all-time low

The Labour MP Chris Bryant has accused UK banks of charging excessive interest rates and taking undue advantage of the surge in demand for emergency loan during the coronavirus crisis.

The act of charging exorbitant rates and taking minimal risks look like profiteering to me, added Bryant. As per some media report, Bryant stated that the British banks are charging anything between 7% and 12% despite the fact that the Bank of England has slashed its base rate to an all-time low at 0.1%, last week.

British government has, therefore, warned all major banks and lenders against profiteering from economic distress and has asked to pass on the benefits of state-backed stimulus measures to their consumers. Last week, the Bank of England had also increased its quantitative stimulus package by launching fresh £200 billion money creation scheme. It came in addition to the announcement made earlier by the Chancellor of the Exchequer, Rishi Sunak, introducing financial support of initial £330 billion loans to businesses with the view to support lending of up to £5 million to small and medium sized businesses with no interest due for the first six months.

Bryant asked banks to consider the number of their new loans that would end up being state-backed in the case borrowers fails to pay. Bryant further said that given the interest rate cuts and government-backed borrowing schemes, banks should be offering loans with interest rates nearing to 1% to 4%, depending on risk.

However, the leaders of the banking industry defended their move, stating that not all businesses qualify for the government schemes, and, hence, those who do not, would be offered lending facilities at normal rates. They further explained that run-of-the-mill business loans were not dependent on Central Bank’s base rate solely, rather are influenced by several factors including credit risks charges, loss probability, lender’s funding cost, and operating costs borne by lenders throughout the lending period.

British government continue to emphasise on the need to ensure that the benefits of the measures are passed through to businesses and consumers at this time of the economic crash that is expected to be worse than 2008 crisis.

The Chancellor of the Exchequer, Rishi Sunak, has even urged the banks to put their maximum efforts to save struggling companies from collapse. Amid the growing concern for UK businesses with the country in complete lockdown, banks have been asked t to keep lending to companies which were considered viable before the coronavirus crisis.

• Why should you be concerned with any change in the interest rate?

Interest rates are what you pay to banks for borrowing money, and what banks pay to you for saving moving. Whereas bank rate, also mostly referred as ‘Bank of England base rate’ or just ‘interest rate’, is a part of Central Bank’s Monetary Policy action that aims to strengthen the economy while maintaining inflation low and stable.

Bank Rate is a single most important interest rate that influences the rates banks charge people to borrow money or pay on their savings. So, Bank Rate and Interest Rates are interconnected. If Bank Rate changes, then usually banks also change their interest rate in the same direction on savings and borrowings. So, in case Bank Rate fall, your interest payments on loans and mortgage would get cheaper.

However, interest rates could change for some other reasons as well, such as inflation, exchange rate and demand and supply of money, among others. A change in interest rates affects how much people spend. And how much they spend overall determines how much things cost, i.e. price and inflation. Therefore, at the time of higher inflation, the central bank increases bank rate to plough out money from the market that results in higher interest rates charged by banks- expensive loans/mortgages- reduction in borrowings- more savings- fall in demand- price correction- stable inflation. In contrast, BOE slashes down the interest rate to pump in money and strengthen the economy at the times of recession.

• Stock Market Performance

London Stock Exchange continued jubilant move on 26^th March as the US Federal’s ‘unlimited’ stimulus package lifted the panic-stricken move and investors turned optimistic that all the governments will be coming with similar measures to counter the economic impact of coronavirus outbreak. FTSE 100 added another 2.24% or 127.53 points and ended the session at 5,815.73 at the end of the trade on Thursday, 26 March 2020 (10: 53 AM GMT).

FTSE All-Share Index surged by 76.77 points or 2.47% to 3179.75 at the market close on 26 March 2020, while it’s day-high and day-low stood at 3,179.75 and 3,011.61 points, respectively.

Also Read: Delay In Financial Results, Dividend Cuts; What’s Coming Next?