What the rise in interest rates means for UK businesses
After much speculation, the Bank of England announced earlier last month (2nd August 2018) that it will raise the base interest rate from 0.5% to 0.75% - marking only the second rise in 10 years. While this raised alarm bells for some business owners, especially with the post-Brexit outcome still unclear, the increase has mostly been welcomed as a sign of Britain’s strengthened economy.
As the increased base rate came into effect on September 1st, SinoScan UK takes a look at potential implications for the British manufacturing and engineering industry.
Consumers feel the pinch
Inevitably, some consumers will feel the pinch more than others.
Those with variable rate mortgages will be hardest hit, reducing their overall household incomes, which will have a knock-on effect on businesses across the board. On the other hand, there will also be people who now have a little more money spare – in particular, those with savings. While this doesn’t guarantee that these consumers will be more willing to spend, it shows the interest rate hike does not have to be bad news for UK businesses.
For the manufacturing and engineering industry in particular, those connected to the property and motor sectors can expect to see some change.
Countrywide Estate Agents has forecast that the property market will see prices increase by around 4% across the UK, while big lenders such as Barclays, Santander and Nationwide have all taken steps to withdraw some of the lowest rates on mortgages.
Automakers have been offering historically low rates for car shoppers in recent months, which has been good news for the leasers. With the change in interest rates, it’s expected that both financing and buying will be a little more expensive, though how much more remains to be seen.
Despite these changes and the some commentators predicting consumer spending will likely fall a little, the chances are there won’t be too much extra impact to add to factors such as Brexit and stamp duty rates; which are having far more influence.
Cost of borrowing
Historically, an increase in the interest rate has also meant more expensive businesses loans. This could therefore spark some concern for the manufacturing and engineering industry, who often rely on business loans to complete work.
For businesses which already have loans, the new costs will need to be factored in and this will undoubtedly affect their cash flow; which can slow down business growth and hamper expansion plans.
However, some positives can also be taken away from this. Some businesses will now have to think twice about taking out a business loan; which should discourage what many call “irresponsible borrowing”. In turn, this fall in borrowing should help control economic growth and slow down inflation, which has been rising in the UK.
This month’s interest rate increase is likely to affect the exchange rate, which could also change the economic forecast for exports.
Currently, 44% of total UK exports come from manufacturing alone. While theoretically a stronger British currency may lead overseas customers to look elsewhere for cheaper prices, the UK manufacturing economy still remains strong, with forecasters predicting if current growth trends continue, the UK manufacturing industry will break into the top five by 2021.
As a result of the increased interest rate, imports are likely to grow. When rates rise, the pound is strengthened and goes up in value; which means it can buy more foreign currency, making imports cheaper.
Manufacturers and engineers can therefore import more materials and machinery from overseas, in order to reduce costs and increase profit margins.
In the UK, manufacturing makes up 11% of GVA, 44% of total UK exports, 70% of business R&D and employs more than 2.6 million people. This combined with low labour costs and strong returns, already makes the UK an attractive market to foreign investors; so with the new interest rate expected to only strengthen the pound further, foreign investments are likely to increase as investors seek to maximise their returns.
To conclude, the good news is that by raising interest rates, the Bank of England is placing its confidence in the UK economy. While some businesses will be more prepared than others, overall the forecast is positive. It will certainly be interesting to see how the manufacturing and engineering industry adapts to the first rate rise in over a decade, particularly when viewed against the country’s impending exit from the EU.