Funding costs for motor finance providers are
on the rise, as markets are bracing themselves for interest rate
rises over the coming months.
Last week’s Bank of England inflation report
revealed consumer price inflation to have risen to four percent in
January, with a further rise to five percent or more possible
before the end of the year.
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Bank governor Mervyn King has insisted that
reactionary bank rate increases are not a certainty, but this has
not stopped markets pricing in anticipation of a 1.25 percent
rate.
Several lenders in the car finance market have
already reported increases to their cost of funds over the last
month in the region of 0.5 percent to one percent, with interest
rates charged to consumers increasing accordingly.
These increased prices will prove a challenge
to motor finance sales, especially when combined with the effect of
both similar rate rises in the mortgage sector and continued
inflation on the consumer pocket.
Paul Harrison, head of motor finance at the
Finance and Leasing Association (FLA) commented:
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By GlobalData“The latest announcements from the Bank of
England will have provided food for thought for motor lenders.
Inflation is outpacing wage growth, so household budgets are
getting tighter. If high inflation leads to a base rate rise,
increased mortgage payments will mean households don’t have as much
disposable income and may struggle to meet payments on their cars,
as well as other living costs.”
Harrison added that the Bank would be unlikely
to raise rates while economic growth figures are still shaky.
However, reports last week that January retail sales figures had
outperformed expectations have increased the chances of early rate
rises.
Current bank rate has remained static at 0.5
percent for nearly two years.
