UK Banks Looking to Increase Lending Rates on Credit Cards

UK Banks Looking to Increase Lending Rates on Credit Cards

Summary

  • The latest survey by BoE has found that banks in the country had increased the cost of consumer loans in the third quarter of the year and are likely to follow the suit in the fourth quarter.
  • The rate increase has been done on credit cards and consumer loans which have seen an increase in demand in recent months.
  • The Bank of England has been trying its level best over the past few months to prop- up economic activity in the country and increase liquidity.

In its most recent report on credit conditions in the UK published on 15 October 2020, the Bank Of England (BOE) has said that lenders in the country are anticipating an increase in credit and other unsecured credit demand during the fourth quarter of the year. The banks in the country increased their interest rates on such loans in the third quarter and are also expected to continue to increase in the fourth quarter.

During the third quarter period, the defaults, however, did not rose among households who had taken secured loans, but lenders expect that there will be a rise in the numbers during the fourth quarter. It is to be noted that since the end of the lockdown consumer spending has been increasing steadily; however, the recent prospect of a resurgence of the pandemic has caused a jittery in the markets.

Measures by BoE and the British government to prop up economic activity

The coronavirus pandemic and the ensuing lockdown has caused widespread economic damage in the United Kingdom. For the month of April, the GDP of the country shrunk by about a fifth and for the full year, it is expected to shrink by about 9 per cent. The economic conditions and the demand conditions in the country is very similar to a deflationary situation when production and demand both are at less than optimum levels.

As soon as it became apparent in late February and early March that the pandemic will have a deeply damaging impact on the British economy the government rolled out a number of stimulus packages to help the country out of the impending hit. By that time BoE had already lowered its interest rates to historic low of 0.1 per cent.

However, the lockdown imposed from 23 March 2020 for a six-week period forced almost all business activity in the country to a complete standstill. All monetary measures were thus ineffective for that period as the problem was more structural, and only effective policy steps could be employed to stop the situation from deteriorating further. However, the central bank did implement a stimulus measure at that time, which produced almost the same effect as negative interest rates would.

The government offered a loan scheme called the Coronavirus Business interruption loan Scheme (CBILS), whereby the central bank guaranteed loans extended by scheduled banks to support businesses during the crisis. This measure, as well as a number of other measures rolled out at that time, were extremely helpful in arresting a deeper slide of the economy and stimulating a swifter turnaround when the lockdown opened.

The performance of four top money lenders in the UK over the past month

  1. Barclays Plc

Barclays Plc (LSE: BARC) is a British multinational bank with a worldwide presence. The bank has four core divisions, namely, corporate banking, personal banking, wealth management and investment management.

(Source -Thomson Reuters)

As on 16 October 2020 (10.49 AM GMT+1) the shares of the bank have been trading at GBX 99.34 per share losing 0.90 per cent over the previous day's close.

  1. Standard Chartered Plc 

Standard Chartered PLC (LON: STAN) is a British multinational banking company, with headquarters in London, the United Kingdom, formed in the year 1969, through the merger of two separate banks – the Standard Bank and the Chartered Bank.

(Source -Thomson Reuters) 

As on 16 October 2020 (10.58 AM GMT+1) the shares of the company have been trading at GBX 358.50 per share losing 0.80 per cent over the previous day's close.

  1. HSBC Holdings Plc

HSBC Holdings Plc (LON: HSBA) in the United Kingdom domiciled international banking and financial services company with a widely spread global footprint. HSBC Holdings Plc has also been consistently ranked amongst the top ten largest banks in the world, and it is the largest within Europe.

(Source -Thomson Reuters) 

As on 16 October 2020 (11.01 AM GMT+1) the shares of the company have been trading at GBX 298.45 per share losing 0.050 per cent over the previous day's close.

 

  1. Lloyds Banking Group 

Lloyds Banking Group Plc (LSE: LLOY) is a British banking company with operations in the United Kingdom, Europe, United States of America, Asia, and the Middle East. The bank’s offerings include retail banking- mortgage and sole traders and commercial- life, pension & insurance, and wealth management.

(Source -Thomson Reuters)

 

As on 16 October 2020 (11.03 AM GMT+1) the shares of the company have been trading at GBX 26.22 per share losing 1.39 per cent over the previous day's close.

Outlook

The outlook of the British banks regarding the fourth quarter of the year may not be that firm, though, it is possible that people who have curtailed their spending would come out to spend during the festive season, the threat of the resurgence of COVID- 19 could play spoilsport in that assertion. This is the time when the banks could encourage people to spend more by decreasing their rates, so that the general economic conditions in the country improve, which will ensure higher earnings for the banks.

 

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