How Can Businesses Weather an Increase in Interest Rates?
The UK’s economic outlook has been difficult to predict lately, as successive financial crises rock businesses and households alike. The trouble began with a spike in the rate of inflation, itself largely a result of rising energy prices. Simultaneous increases in international instability and barriers to trade caused wholesale costs to rise too, leading to the Consumer Price Index rising to double figures.
These issues have been compounded, though, by recent government actions. The Bank of England was already working to slow the rate of inflation through rising interest rates – a move designed to slow borrowing, spending and growth. But Chancellor of the Exchequer Kwasi Kwarteng recently revealed a pro-growth ‘mini-budget’ that acted in opposition to the Bank of England’s attempts, threatening to drive inflation yet higher.
The Bank of England’s emergency response to this market instability – defined by a near-collapse of pension funds – included a steeper rise in rates of interest than initially anticipated. This steep rise is having a profound impact across the board, with domestic households already feeling the pinch through dramatic increases in the cost of their mortgage. But what is the impact on the business world, and how might emerging businesses weather the storm?
Interest Rates and Industry
Interest rates apply to any form of credit or borrowing; loans and other funding agreements have an attached cost in the form of interest, to be paid back as a percentage of the value of the initial loan or funding. This works the opposite way, though, too. Money saved accrues interest from banks, in the form of a percentage.
Through compound interest, this can be a strong way to shore up money and grow savings – but not, incidentally, in a high-inflation economy. The Bank of England has risen interest rates in an effort to place downward pressure on borrowing. The more expensive it is to borrow money; the less incentivised businesses are to borrow – and the less overall economic activity will occur.
But for businesses that already have long-term loan or funding agreements, variable rates of interest can mean unexpected – and even existential – costs. What can businesses do to offset this impact?
Weathering the Storm
Ultimately, businesses with large credit or debt outlays need to minimise their overall costs and expenditure. For many, this may be as simple as battening down the hatches and slowing the purchase of new supply. However, there are numerous ways to approach cost-saving – some of which could take advantage of short-term investments.
One key route is automation, with AI-assisted software solutions minimising labour costs and time-sink into administrative projects. Businesses might consult with a technology lawyer to find the right path to automation and machine learning integration, and best remain legally compliant as well as budget-friendly.
The Outlook for 2023
The outlook for 2023 is not a positive one currently, as markets maintain their distrust of the UK government to act sensibly with regard to their recently-announced Growth Plan. The pound remains volatile, and many financial pressures on businesses and households alike remain unaddressed. A difficult winter beckons.
