After the fourteenth consecutive increase in interest rates since 2021, many business owners will be asking themselves the same thing: “When will interest rates finally fall?”
Higher interest rates increase the cost of borrowing on loans, overdrafts and credit cards. Equally, your customers may be facing higher interest costs if they have borrowings. Due to this and other economic conditions, your customers may to cut back on spending, which in turn can further restrict your cash flow and investment plans.
Earlier this year there were significant declines in inflation in both the USA and Europe. This is an encouraging sign for the UK, which has also started to see more significant falls in inflation.
Rising like a rocket, falling like a feather
Inflation has already fallen slightly to 6.8 per cent in July 2023 (the latest figure at the time of publication), which could be a good sign for struggling businesses.
However, the Bank of England (BoE) continues to increase the base rate, sitting at a recent high of 5.25 per cent at the end of August, with expectations that it will reach a peak of 5.5 per cent during September 2023 and remain high for the following 12 months.
Any subsequent reduction in interest rates is likely to be slow, with forecasts suggesting that the BoE will have only cut interest rates to three per cent by 2026 as the Bank tries to meet its two per cent inflation target.
This is indicative of earlier predictions that despite the rapid increase in rates, they will be slow to come back down again. So, we are still going to be experiencing high-interest rates for the foreseeable future.
In addition, the UK economy witnessed a weakening of its position, with a further contraction likely in the coming year.
What does a fall in interest rates mean for your business?
Put simply, when the interest rate does eventually drop it will become cheaper to borrow and easier to pay back loans. The low interest rates should, therefore, offer an incentive to borrow and invest in your business.
Your customers and clients are more likely to have money to spend once interest rates fall. The inflationary pressure on your employees’ wages should also decline, helping you to manage costs.
In the meantime, businesses need to find ways to build resilience and manage the costs and challenges that come with high-interest rates.
An experienced accountant can help you adapt to new market opportunities as interest rates fall and ensure that you have the capital to successfully ride out the current storm.