49. Interest rates will rise but when?

In the summer of 2013, the Governor of the Bank of England, Mark Carney, stated that the Monetary Policy Committee would not consider increasing interest rates until unemployment was at 7%.  At the time unemployment was at 7.8% and it was projected to take a couple of years to get down to the 7% target. Carney projected that it would be 2016 before the target was hit.

As it turned out, the unemployment rate for December 2014 stood at 5.8%; the first time it had been below 6% for more than six years.  Yet interest rates have not increased. Currently, with inflation heading towards zero due, in no small part, to the reduction in oil prices and with the growth within the economy slowing, the pressure to increase interest rates is reducing month by month.  So at some point they simply have got to increase; what should you be doing to prepare for an increase?

A new one for you to remember is the phrase “Zombie companies” – companies that are only managing to survive because the interest rate is low.  And who, in all probability will fail when interest rates rise.

Those businesses who might be describes as “just above Zombie status” will slide into that category when the rate increases. So what should we be doing to protect ourselves for the future?

Stress test your business

You should regularly stress test your business to understand the impact interest rates will have on your financial performance.  You will need a financial model, allowing for a gradual increase in interest rates based on any existing or future loans.  None of us expect rates to jump rapidly, but all businesses need to consider and understand the impact any increases in interest rates will have on their finances.  Doing so leaves them in a far stronger position from which to evaluate options available and to quickly take appropriate action and not be caught on the back foot.

The December Monetary Policy Committee minutes indicate that the Bank of England are in no rush to increase base interest rates at present – but there is no guarantee that banks and other lenders will not increase the margin they charge to their customers.

Businesses who take time now to plan and prepare for the future – and who understand the impact that changes outside their control will have on their business – will be able to take early action thus enabling them to adapt and grow.

And having someone in your team focused on the external factors lets you focus on the future of your business, so that your business has a future. And it won’t surprise you to know that this would be a perfect area for a part time Finance Director to focus on as part of their broader added value.

This blog has been written by Peter Stamps, Client Finance Director with Tectona.

To find out more about understanding how you might more readily identify potential risks to your business – or if you would like to discuss any of our other blog topics – please contact Mark Nicholls on 07818 407061 or Email.

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