Bank Of England Hints At Limited Rate Rises

Bank Expects To Keep Borrowing Costs Low By Historic Standards

14.05.2014

Steven Beahan, Partner | +44 (0)114 294 7868

The Bank of England's Quarterly Inflation Report has been published - and it provides SMEs with plenty of reasons for cheer, not least the prospect that rises in the cost of borrowing will be gradual and limited.

Its current appraisal of the economic situation points to a wide array of very positive signs, with substantial growth that it believes may turn out to be even stronger than initially estimated, falling unemployment, continued low inflation and rising incomes. This situation is also causing confidence to rise and consequently bolstering business investment levels, leading to an increasingly broad-based recovery.

All this offers good news for SMEs along with the rest of the economy. However, not everything is rosy, particularly when it comes to business lending. The report observed: "The terms on which companies can borrow have also improved, although they remain restrictive for some small and medium-sized enterprises."

SMEs will hope that this aspect improves as economic confidence grows and banks experience greater confidence to lend. However, firms who are able to borrow will be keen to see this cost staying low. They may take plenty of encouragement from the Bank's expectations over how and when it will break with the base rate policy of holding the level at 0.5 per cent, which has been in place since March 2009.

The report took into account potential "headwinds" facing the economy, such as an anticipated slowdown in employment growth and the possibilities that the growth in productivity or business investment might not be as substantial as expected.

It stated: "When Bank rate does begin to rise, it is expected to do so only gradually. Moreover, the persistence of those headwinds, together with the legacy of the financial crisis, means that Bank rate is expected to remain below average historical levels for some time to come."

This indicates that, far from the next couple of years bringing a return of rates to pre-crisis levels of around five per cent, the cost of borrowing will find a new - and lower - definition of normal.
 
Last week, the Confederation of British Industry predicted the first rise in the base rate would be by 0.25 per cent and occur during the first quarter of 2015.

Expert Opinion
While positivity is continuing to increase across the economy, this report has highlighted how there is still much room for improvement. This may be welcomed by small businesses, many of which are still facing some short-term issues despite confidence growing – with one obvious issue being access to finance.

"As the article outlines, this should hopefully improve in the coming months and mean small businesses will be able to put their growth plans into action. We would urge any organisations taking such steps to tread carefully and seek advice on all aspects of developing their offerings, with ultimate aim of avoiding any potential growing pains."
Steven Beahan, Partner