Simon Carter, Director of Touch Financial, looks on the bright side of the Bank of England’s new ‘forward guidance’ on interest rates.
Bank of England Governor Mark Carney’s plans to keep interest rates at 0.5% until the employment rate falls to 7% has been met with criticism in the past few weeks. The BoE plans to entice homeowners and businesses with this low interest rate, but the policy has savers’ groups worried; The Times has quoted Ros Altmann, a former government pension adviser, who cautions that a combination of low returns on savings and high inflation could lead to a loss in real money for savers.
While it is unfortunate that this may spell trouble for savings in real terms, we also need to be focusing on business confidence. Finance is one large deterrent to this, and as someone in the business funding industry, my main concern is how this will play out for businesses seeking funds. Given that the cost of borrowing may increase in real terms, I believe that businesses will be looking less to traditional forms of funding, like bank loans and overdrafts, and will instead be seeking alternative forms of funding, like invoice finance. After all, an invoice finance facility grows alongside a business’s sales ledger, and is tied directly to the growth of the individual business, ensuring that the business isn’t borrowing too drastically against its capabilities.
All we need now is for the government to step up on efforts in directing businesses to alternative forms of funding, but that’s a topic for another day.
A recent survey by the Confederation of British Industry reports that the service sector has had its fastest rate of growth since 2007. The survey also clocked in a positive reading of confidence, at 28%. This seems to suggest that UK economic recovery may be accelerating, meaning that Carney’s plans to keep interest rates low may have to be revised sooner than 2016.
A simplified reading of the current economic climate places loss in real savings (due to low interest rates) as the opportunity cost for business growth. The possibility that the ‘forward guidance’ plan may inadvertently be successful sooner than expected is cause for (cautious) celebration. I look forward to seeing what else will unfold from BoE policy-making. In the meantime, let’s concentrate on the best practical ways with which to encourage business growth.