Photo of Paul Harrison, head of motor finance at the Finance & Leasing Association Despite the
Bank of England’s (BoE) decision in March to keep interest rates
low, funding costs for motor finance providers have been on the
rise since February, as markets brace themselves for seemingly
inevitable rate rises.

February’s BoE inflation
report revealed consumer price inflation to have risen to 4%
January, with further rises possible before the end of the
year.

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Bank governor Mervyn King
insisted reactionary bank rate increases would not be a certainty,
but this did not stop markets pricing in anticipation of a 1.25%
rate.

Several lenders in the car
finance market reported increases to their cost of funds in the
region of 0.5% to 1% in early March, 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 & Leasing Association said: “The latest
announcements from the Bank of England will have provided food for
thought for motor lenders.

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“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.

“This means households 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.

The current bank rate has remained static at 0.5% for two
years.