Following the fourteenth successive rise in interest rates since 2021, a common question among business owners is: “When will interest rates finally drop?”
Elevated interest rates mean higher repayments on debts such as loans, overdrafts, and credit cards. This not only affects you but also your customers, who might find themselves grappling with increased debt costs.
This scenario, coupled with other economic factors, might lead customers to reduce their spending, potentially impacting your cash flow and investment strategies adversely. However, there is a silver lining; earlier this year, both the USA and Europe witnessed substantial reductions in inflation, a trend that has begun to manifest in the UK as well.
Inflation’s slow descent
As of August 2023, the most recent data indicates a slight decrease in inflation to 6.7 per cent, offering a glimmer of hope to businesses facing hardships. However, it might be premature to breathe a sigh of relief. The Bank of England (BoE) persists in increasing the base rate, which reached 5.25 per cent at the close of August and has remained frozen at this higher rate in September.
Predictions suggest a gradual decline in interest rates, with the BoE projected to reduce rates to three per cent by 2026 in its endeavour to achieve a two per cent inflation target.
This aligns with earlier forecasts indicating a slow descent following a swift ascent in rates, implying that high-interest rates will prevail in the foreseeable future. The UK economy is also experiencing a downturn, with further shrinkage anticipated in the upcoming year.
The implications of decreasing interest rates for your business
In essence, a reduction in interest rates will facilitate more affordable borrowing and ease loan repayments. Consequently, it should encourage borrowing and investment in your business. Furthermore, a dip in interest rates would mean your customers and clients having a greater disposable income, and a decrease in the inflationary burden on your employees’ salaries, aiding in cost management.