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Base rate changes sparks interest

Direct lender HSBC is challenging the wisdom of last month’s surprise base rate increase announced by the Bank of England monetary policy committee (MPC).

The increase was small – by 0.25% of a percentage point to 4.75% – but led to press speculation that a further rise could be on the way soon. Widespread and confident “no change” forecasts before the MPC meeting led to the shock felt after the announcement.

Keith Parry, head of motor finance at Barclays Bank, says: “We expected an increase, but this one came earlier than we thought likely. The effect should be marginal on motor finance rates, but there could be another rise in base rate.”

It is the creation of uncertainty that is worrying some in the automotive loan and other sectors. “Why now?,” asks one of HSBC’s senior economists. “In all, it was a decision that was both surprising and confusing.

“There are factors pulling the economy in both directions, and enough uncertainty to justify a more cautious approach to rates.

“The increase reflects the MPC’s upbeat view of the economy, at a time when unemployment is rising, bankruptcies are soaring and debt remains a deadweight on the consumer sector.”

The MPC’s prime motivation for the first change since August 2005 appears to have been a determination to check inflation, which in June reached 2.5%. The Government target is 2% and inflation is expected by economists to exceed it for some time.

Car purchase lenders adjusted some APR rates marginally. The increase in itself makes little difference, though the psychological effect is potentially damaging.

One motor finance sector executive says: “It’s important to keep this in perspective. Twenty to 30 years ago, inflation rose as high as 20% per year, but nowadays some people get worked up over the first figure after the decimal point.”

The HSBC economist thinks the increase should be viewed as a pre-emptive strike, rather than the beginning of a series of increases. “Nervousness about general inflation seems to be exaggerated,” he says.

This month’s plate change, and the accompanying marketing programmes by car manufacturers, should create a surge in car loans from all sectors – the reality will be watched with keen interest. There are concerns that increases in the price of energy in the home and filling station pump price increases will depress demand for ‘56’ plate cars.

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