Download Are Businesses Ready To Deal With A Rise In Interest

POLICY BRIEFING
ARE BUSINESSES READY TO DEAL WITH A RISE IN INTEREST
RATES?
Half of businesses fearing rise are not
planning response
Drop in consumer demand
will jeopardise growth
Higher rates good for finance,
bad for construction
Rate hike to drive demand for higher wages,
especially for skilled staff
In advance of a potential rise in the Bank of England’s interest rate in 2015 from its current
historically low level of 0.5%, ICAEW surveyed 500 businesses on how it may or may not impact
them. The responses arrived at four main conclusions on how a rate rise will affect businesses:
1. Concerns over business preparations in advance of higher rates
ICAEW research finds that more than half of those who think an interest rate rise will have a
negative impact on their bottom-line are not considering any pre-cautionary measures to hedge
against it. There are a large number of new businesses (1.6 million) which have been established
while interest rates have been kept at 0.5%; therefore this suggests that they would be unprepared
to operate in a higher rate environment. Hence, a faster than expected rise in the cost of borrowing
could place cost constraints, prevent business growth and may even lead to a rise in insolvencies.
Are you considering any measures to deal
with a rise in interest rates if you expect to
be impacted negatively?
The number of new businesses has risen by
more than a third since interest rates went
down to 0.5%
+ 1.6 million
54%
46%
Yes
No
2009
N.B. The percentage is of those who said an interest
rate rise will negatively impact them
2010
2011
2012
N.B. The cumulative number of new businesses registering
with Companies House since 2009 is more than 1.6 million
Policy recommendation: A significant hike in the Bank of England’s interest rate would place an
added burden on those new small and medium sized businesses that have no experience in
operating within a higher rate environment. Therefore a future rate rise should be gradual and
accommodate the continued growth of these new businesses.
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2. Drop in consumer demand will jeopardise growth
Consumer spending accounted for the majority of the growth seen last year – 86% of growth
according to the OBR. ICAEW research finds that if there is to be a rise in interest rates, 30% of
businesses expect to be negatively impacted by a drop in customer demand. The diagram below
shows that personal and consumer debt levels have recently reached a record high of £1.43
trillion. Therefore an earlier than expected interest rate rise will push a lot of households into an
unsustainable debt cycle and will dent consumer confidence, one of the key drivers of the UK
economy over the last year.
Personal debt levels have reached a record high of £1.43 trillion
£1.43 trillion
£1.42 trillion
£1.41 trillion
£1.42 trillion
£1.41 trillion
£1.40 trillion
Interest rates
2009
2010
2011
2012
2013
2014
2015
Policy recommendation: The Bank of England should wait until other economic drivers pick up
such as business investment and exports. Jeopardising consumer spending at a time when it has
been the main driver of the recent recovery will cast a doubt over the economy’s ability to maintain
growth.
3. Higher rates good for some; bad for others
A future rise in interest rates will have an uneven impact across the different sectors of the
economy, hurting consumer-reliant businesses more than those who have more diversified
revenue sources. ICAEW research finds that while 30% of construction companies believe their
bottom-line will take a hit, more than a third of financial services firms expect to benefit from a rate
rise. This will add further strains on efforts to rebalance the UK economy and to support those
industries, such as construction, which most suffered from the financial crisis. The ICAEW/Grant
Thornton Business Confidence Monitor shows that confidence in the construction sector is
booming, and therefore a premature rate rise will dampen this before it is allowed to translate into
greater business investment and economic activity.
Policy recommendation: Policy makers should be wary of the unintended consequences a faster
than expected rate rise will have on key sectors of the economy. Although higher rates may be
good for some, it may prevent investment growth and more hiring in industries which the
government has identified as target sectors for growth.
4. Demand for higher wages will hurt employers
More than a quarter of businesses believe that a rise in the interest rate from its current level of
0.5% will affect their staff pay levels. The findings in the most recent ICAEW/Grant Thornton
Business Confidence Monitor indicate that businesses expect total salaries to rise by 2.2% over
the next 12 months, thereby overtaking inflation. A rate rise in 2015 will put more pressure on wage
demand and leave businesses in a dilemma over whether to retain skilled staff at a higher cost or
cut-back on hiring.
Policy recommendation: Decisions over when and how to raise interest rates should take into
consideration the impact on employers and the retention and recruitment of skilled staff which
would support their further growth.
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