We’ve become so used to low interest rates in the UK that the pre-credit crunch rates of around 5% seem more like science fiction than historical fact. Likewise, if you’d told even the most seasoned economist a decade ago that in 2017 the interest rate would have stayed at 0.25% for the whole year they’d have scarcely believed you.
However, as a nation it’s important that we remember that these historically low rates are not the new normal; they are an exception and, what’s more, they will rise. When they do, it’s vital that UK businesses are prepared.
Late in August, after the Bank of England had voted once again to keep the rate at 0.25%, one member of its monetary policy committee, Michael Saunders, spoke publicly about why he was one of two committee members that had voted to increase rates. While acknowledging that Brexit is causing a large amount of uncertainty (which is something of an understatement) Saunders suggested that one consequence of fewer migrant workers is likely to be upwards pressure on wages; exactly the kind of inflationary pressure that a rate rise would be able to counter.
As Saunders said: “a modest rise in rates would help ensure a sustainable return of inflation to target over time.”
Saunders is a clearly an expert and although recent inflation figures showed a surprise fall, which surely was one of the reasons why the Bank of England left the rate where it was, there’s good sense in what he said. There’s also some implied advice that business owners would be well-advised to listen to.
One of the common worries about interest rate rises is that homeowners may not have properly accounted for their arrival when planning their finances. In an economy in which low wage growth has been common, increases are going to hit pretty hard to monthly budgets.
The same will apply to businesses but with the consequences multiplied over a number of different areas. Higher interest rates will mean a squeeze on your customers’ spending, increase monthly payments on commercial mortgages and you may find that your suppliers begin nudging their prices upwards too.
The good news is that with some sensible planning most businesses will have the ability to cope with a rate rise. As ever, cashflow is vital to every healthy business and so chasing suppliers for prompt payments is going to be even more important than ever. Also, ensuring that forecasts for next year make provision for a rise in interest rates will mean there will be no nasty financial surprises over the coming twelve months.
If you have a question about cashflow or would like to chat about the ways that Ultimate Finance can help ensure your business is in a strong financial position then please get in touch. We will, as ever, be very happy to help.