While UK interest rates stand at a historic low of 0.1 percent, high street banks have been slammed for steep rises, or planned rises, in the cost of overdrafts.
HSBC, TSB, M&S Bank, First Direct, and Nationwide have announced rates of 39.9 percent, NatWest 38.9 percent, and Barclays 35 percent. Meanwhile, Lloyds Bank has announced overdraft interest rates of up to 49.9 percent for individually arranged facilities.
The increases come in the wake of FCA rule changes to simplify the overdraft market. These have banned daily charges that have seen some customers pay steeper rates than payday loans. However, up to one-third of customers could be worse off as a result, especially those needing long-term assistance from their banks.
Many people are losing full-time jobs, with freelancers and self-employed people yet to receive comparable government support to those on PAYE. Anyone in rented accommodation also faces an uncertain future if their income is hit – even though landlords may receive a mortgage holiday.
Demand is falling in countless sectors and some employers are unable to trade. That includes some bank branches.
Shadow Chancellor John McDonnell urged lenders to put the rises on hold, telling the Independent that any interest hike is a “kick in the teeth” for citizens grappling with the coronavirus and its impact on the UK and world economies.
According to Reuters, Britain’s economy is contracting at a record pace, with businesses across the services sector (which forms 81 percent of the economy) shutting up shop in the wake of the crisis.
A Purchasing Managers’ Index (PMI) survey last week suggested the economy was shrinking at a quarterly rate of up to two percent. However, the research was conducted before the enforced closure of shops, pubs, and restaurants, and before the UK went into lockdown.
“This decline will likely be the tip of the iceberg and dwarfed by what we will see in the second quarter,” said Chris Williamson, Chief Business Economist at IHS Markit.
At the lowest point of the 2008-09 recession, Britain’s economy shrank by 2.1% in a single quarter. In that downturn, UK banks were bailed out by the taxpayer to the tune of nearly £1 trillion – something the industry would be wise to remember if it is to retain consumer trust.
Banks themselves are in a tough position. National banks must evolve to help governments and business tackle the coronavirus, said the FT this week, which also reported on the ‘great liquidity crisis’ in the economy.
The Bank of England has abandoned stress tests for the nation’s biggest lenders; they are being stress tested in daily trading.
Less widely reported is the crisis’ impact on so-called shadow banks – institutions that are not regulated as tightly as the mainstream sector, if at all. Many businesses rely on such institutions for financing. Mutual funds invested in corporate debt have been hit by “mass redemptions”, according to the FT.
Meanwhile, the pound has been in free fall against most major currencies, not helped by mixed messages from Downing Street and a leadership team that has appeared lacking in clarity, rigour, and strategic planning. However, Chancellor Rishi Sunak has won plaudits for his own conduct thus far.
Some have called for a government of national unity to take over – a Coalition of Competence.
Worldwide, markets are highly volatile, though the US rallied this week on news of a $2 trillion stimulus and support package.
That said, President Trump has been criticised for his own lack of understanding of the crisis, and his stated desire to see the US back to work by Easter. With those holidays less than three weeks away, that seems an unwise and unrealistic aim.
Gold is looking like the asset to buy, as so often in a crisis, and the concept of ‘corona bonds’ is being discussed globally.