For a year small firms have been waiting for borrowing to get cheaper, and the talk in the markets has turned the other way

Interest Rates and What Comes Next

I have a small overdraft on the business account and a slightly larger opinion about interest rates. Both have been stuck in the same place since the spring.

The Bank of England’s rate has been 3.75 per cent all year. A business bulletin in early August recorded that the Bank held it there following a six to three vote by the Monetary Policy Committee. Another, a month earlier, noted that the Governor had signalled rates were likely to remain on hold.

For most of that time the assumption was that the next move, when it came, would be down. That assumption has quietly reversed. I want to explain why, and what it means for a firm with a loan.

The Committee

Nine people decide the rate. They meet eight times a year and vote. The result is published along with the split.

A six to three vote to hold means that three members wanted something different. The summary I have does not say in which direction the three dissented, and I shall not guess. But a committee that divided is one where the argument is live.

The job they are given is to keep inflation at two per cent. The rate is their tool. Raise it and borrowing becomes dearer, people and firms spend less, and prices are restrained. Lower it and the opposite happens.

Why It Has Not Come Down

The economy is weak. Confidence is poor. In ordinary times that would argue for a cut.

But prices have not behaved. And the reason is the one that appears in every report this autumn. Energy.

A property trade site, reporting on house prices on 2 October, quoted a lender’s economist. Geopolitical tensions remain high, he said, with the conflict in the Middle East exerting upward pressure on energy prices and fanning inflation concerns. That in turn, according to the same report, has led to mounting financial market expectations of Bank Rate increases, which has kept upward pressure on the market rates that underpin mortgage pricing.

So there it is. The markets now expect the rate to rise.

The same piece noted that the Bank’s decision to hold so far this year had helped affordability, but that there were fears rising energy bills might finally force its hand this autumn.

The Bank’s Dilemma

This is the hardest position a central bank can be in.

If prices are rising because people are spending too freely, raising rates is the obvious cure. You cool the economy and prices settle.

If prices are rising because of a war on another continent, raising rates does nothing to the cause. It does not produce more oil. All it does is make a weak economy weaker, in the hope of stopping the higher energy price from feeding into wages and other prices.

Some members of the committee will think that is necessary. They remember that the last time energy prices jumped, inflation went into double figures and took years to bring down. Better to act early.

Others will think it is self-harm. The economy is already struggling. Raising rates into that would cause closures and job losses to fight a price rise that will pass on its own when the fighting stops.

Both are respectable positions. A divided vote is what you would expect.

There Is One Hopeful Note

The headline on that property report spoke of an interest rate lifeline. The lender’s latest house price figures, together with other indicators, were said to offer unexpected hope.

The logic, as I read it, is that a soft housing market and a subdued economy give the Bank less reason to raise. If demand is already weak, it does not need more discouraging.

The same site reported buyer demand cooling across much of prime London. When the expensive end of the capital’s market goes quiet, it usually means confidence among the well-off has dipped, which is another sign of an economy that does not need a brake.

So it is not settled. The markets expect a rise. The data may yet talk the committee out of one.

What It Means for a Small Firm

Here I can be more useful.

If you have a loan or overdraft on a variable rate, your interest is tied to the Bank’s rate. A rise of a quarter of a point is passed on to you, generally within weeks. On a loan of fifty thousand that is about a hundred and twenty-five pounds a year. Not ruinous. But it is in the wrong direction, and there may be more than one.

If you are on a fixed rate, nothing changes until the fix ends. When did you take it out, and when does it expire? A business that fixed two years ago and comes off it next spring may find the new rate higher than it hoped.

If you were planning to borrow, to buy equipment or take on a lease, the calculation has shifted. Waiting for cheaper money now looks like a poor bet.

If you rent your premises, your landlord very probably has a mortgage. Higher rates squeeze him, and squeezed landlords raise rents or sell.

And your customers have mortgages. A household whose payments go up has less for everything else. That is the mechanism working as designed. It is not pleasant to be on the receiving end.

What I Would Do

I am not a financial adviser. I have a forty-pound desk and an overdraft. With that caveat.

Find out what you owe, at what rate, and when anything changes. Many owners cannot answer that without looking.

If you have variable debt that you could fix at a tolerable rate, it may be worth asking the bank for a quote. You are buying certainty. Whether it is worth the price depends on how much a rise would hurt.

Do not count on a cut. Six months ago every forecast I read had rates lower by Christmas. It has not happened.

And chase what you are owed. In a period of dear money, the firm that pays you late is borrowing from you at nought per cent.

The Next Meeting

The committee meets again shortly. I shall be watching the split as much as the decision. Six to three to hold is one thing. If it becomes five to four with the minority voting to raise, that will tell you where this is going.

For a less respectful account of the people who set the price of money, The London Prat has its English satirical news on the Monetary Policy Committee and its UK satirical news about a six to three vote. Bohiney Magazine covers the American central bank, which does the same thing with more press conferences.

SOURCE: https://bohiney.com/