Prior to the Bank of England’s recent monetary policy committee (MPC) meeting, there were two schools of thought on what might happen to the base rate of interest. Some argued that rising inflation would force the BoE to act and increase the base rate, in order to negate the spiralling cost of living in the UK. Others suggested that such a move would be impossible, however, as the looming spectre of Brexit continued to underpin an uncertain and decidedly volatile economic climate.
A Look at the BoE’s Decision and the State of the Economy
Ultimately, the BoE decided to hold the base interest rate at a record low of 0.25%, amid a reported split between the individual members of the MPC. This internal divide was indicative of the prevailing climate, as while some members voted to raise borrowing costs immediately as a way of negating disproportionate inflation growth, others felt that the current base rate and an accompanying money-printing program was enough to support the pre-Brexit economy.
This is even accounting for sluggish real wage growth, which along with inflation hikes (and particularly the rising cost of food) is placing a significant squeeze on households and preventing them from saving their hard-earned money. The plight of the economy was drawn into sharper focus after the Federal Reserve (the central bank in the U.S.) decided to hike their own base interest rate to 1.0%, with further increases proposed for next year.
What This Means for Businesses in the UK
We may well see the BoE increase the base rate in the UK later in the year, of course, but for now it is important that business owners recognise the current climate and adapt accordingly. Now may well be the ideal time to borrow money and raise funds, for example, as the cost of borrowing remains restricted by the base rate. It is also important that businesses reconsider their pricing strategies, however, as dwindling disposable income levels, soaring inflation and the inability of households to save is sure to impact on consumer spending in the months ahead (particularly in relation to big ticket purchases such as cars, holidays and real estate).
With a keen focus on pricing and re-investment, businesses can create a flexible business model that is capable of consolidating in the pre-Brexit climate. This is also a strategy that can pay dividends once the UK has left the EU, as businesses will undoubtedly be forced to alleviate the financial pressure created by higher trade tariffs and reduced turnover. One way in which this can be achieved is through cash flow finance measures such as invoice factoring, which enables payments to be advanced from your sales ledger.
