Mark Carney, the Governor of the Bank of England (BoE), last week hinted that interest rates may remain steady until 2017. This is potentially great news for UK SMEs, but should small businesses take the Governor at his word? Why would a rise be undesirable?
SMEs typically rely on a combination of debt and equity-based financing. A rise in interest rates could put struggling start-ups out of business by increasing loan repayments. Soaring rates would also cause firms to increase prices in an attempt to balance the books, thereby throwing many SMEs’ current supply chains into chaos.
Conversely, a rate freeze would give small businesses a chance to finance growth through affordable borrowing, and would make it easier to cope with international pressures emanating from the Eurozone and China. Given that SMEs are preparing for domestic battles related to the new National Living Wage in addition to resisting macro-level pressures, it isn’t hard to see why the sector would welcome stability.
Rate rise uncertainty
While it might seem safe to trust a source such as the BoE’s governor, not all commentators think that UK SMEs should relax just yet. Alan Clarke of Scotiabank, for instance, thinks that the BoE’s behaviour could be heavily influenced by events across the water. If the US Federal Reserve decides to raise interest rates, Mr. Clarke believes that “…a hike could still arrive in early 2016.”
Other analysts are suggesting the exact opposite of this scenario, and have even hinted that rates could be cut by December 2016. Such predictions are based on hard evidence indicating falling UK consumer confidence, and are as theoretically sound as Mr. Clarke’s suggestion. How should British SMEs react to this bag of conflicting stats and forecasts?
There’s no way for SMEs to know the future. If rates stay low as Mr. Carney suggests, then businesses will have another weapon in their arsenal to propel growth and alleviate financial strain. On the other hand, small firms who prepare for the worst will almost certainly be better off in the long run.
Ethical Enforcement Agents such as Dukes Bailiffs can give SME bosses extra peace of mind by securing cash flows. Small business owners who want payments to remain constant in a changing economic landscape should speak with a Dukes Debt Advisor today.