How Will Stagnant Interest Rates Impact On Your Business?

Interest Rates

Since the so-called Brexit vote in June, the UK and European markets have experienced huge volatility. This has been exacerbated by Britain’s controversial decision to delay triggering Article 50 and the lack of a viable (or at least visible) contingency plan, as the ongoing uncertainty continues to create fluctuations in the value of shares, services and currencies.

This has also had a debilitating impact on near-term economic growth, with the central banks across Britain and Europe forced to intervene to avoid the threat of recession. Last week saw the European Central Bank (ECB) hold the Eurozone’s base interest rate at zero, for example, while maintaining the option of executing further cuts and urging politicians to take decisive action for the long-term future of the economy.

How Will This Decision Impact UK SMEs?

After the immediate aftermath of Brexit saw the value of the pound and the Euro plummet, we had seen a brief period of robust recovery in the European market. Make no mistake; however, experts at the ECB are convinced that the ongoing uncertainty surrounding Britain’s status within the single market has played a pivotal role in dampening Eurozone growth. With the Euro underperforming and the IMF revealing a diminished growth outlook for the year ahead, the authorities have moved to act quickly and effectively.

More specifically, the ECB have continued its strategy of investing £68 billion in bonds every single month, as part of a wider quantitative easing (QE) program. This, along with the continuation of a zero interest rate, is likely to persist well into 2017 as the financial authorities look to maintain some form of economic harmony until the climate can improve organically. Ultimately, the ECB want the region’s inflation rate to increase beyond 1.5% (it is currently 0.02%) before it begins to ease its stimulus measures.

While this is not the news that SMEs and investors in Europe were hoping for, it has been met with a mixed response in the UK. Of course, the introduction of stimulus measures is indicative of a strained economy, meaning that the level of sentiment and SME confidence is likely to remain low for the foreseeable future. Those who import goods into the EU may also suffer from a depreciating exchange rate, forcing them to reconsider their pricing strategy and reconsider the amount of capital that they hold in alternative currencies.

A Look On The Bright Side For UK Firms

Conversely, the maintenance of base interest rates in the UK and the EU will lead to cheaper borrowing costs, making it easier for SMEs to take out business loans and reinvest in their ventures. Consumers may also be willing to spend more, particularly as savings rates plummet and the desire to hang on to their capital diminishes. While independent outlets such as Kent Reliance continue to offer competitive ISA and savings rates, for example mainstream lenders have recently slashed their own and culled promotional offers.

Altogether this equates to a mixed outlook for British SMEs, depending of course on their market and the nature of the service or products that they sell. Without these stimulus measures, however, it is likely that both the UK and the ailing Eurozone would be plunged into a deep and dark period of recession. This is something that must be avoided, particularly with the uncertainty surrounding Brexit unlikely to be resolved any time soon.

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Marcus Turner Jones

Marcus graduated in Economics from the University of Sheffield before working in London in the finance sector. He now lives in Buenos Aires as a freelance writer and investor with his dog, Luna.