Last month, the Bank of England announced they would be keeping interest rates frozen at 0.25% until 2019. A survey found 66 out of a total 67 economists believed interest rates would remain low until after the UK officially leaves the EU. The Bank of England decided to cut the cost of borrowing to 0.25% last year as a way of handling the slowing economy – but what effect has this had on the UK, and how will it affect small businesses?
As the results of the EU referendum were announced, many feared the UK economy would take a serious hit. However the opposite now appears to be true – the economy is growing, the pound continues to regain its strength, and the UK unemployment rate remains at the lowest it has been since 1971. Although inflation has begun to rise, it isn’t rising as quickly as first predicted.
The UK economy has already reacted to Brexit in a way which economists hadn’t predicted. Despite the UK economy performing better than expected, the Bank of England is unlikely to raise the interest rates any time soon while the future of the economy remains in uncertain times. So how does this affect small businesses?
The effects of low interest rates on small businesses
The main effect of low interest rates is that borrowing becomes much cheaper, which then means investing money into a business becomes a much more attractive option. A long term loan would be beneficial for the initial start-up costs of a small business, while a short term loan could help cover smaller costs.
Small business owners may choose to take advantage of the low interest rates and kick-start their businesses. More businesses beginning to trade as a result of the low interest rates will have a positive impact on the UK economy and will help fuel economic growth in the UK.
Consumers will also benefit from lower mortgage rates. This means households will have a greater disposable income which could then be spent elsewhere. Small businesses would benefit greatly from this as they may see more customers buying their products. The higher rate of consumer spending will help the economy grow faster.
While low interest rates mean taking out a loan becomes cheaper, it also means savers will get less return on their savings. While there is a disincentive to save, people will choose to spend their money instead. This too leads to greater consumer spending. Again, this is great news for small businesses as they are likely to see a greater number of customers purchasing their product.
However, the long term effects of low interest rates is that greater consumer spending means inflation is more likely to rise. Higher inflation will lead to a rise in the price of goods, meaning consumers may eventually begin to spend less. The Bank of England will then raise interest rates as a means of slowing the rate of inflation. Consumers will then have a greater incentive to save as they will get a greater return on their money.
The cost of borrowing will also increase as interest rates rise, meaning business owners may be less encouraged to take out a loan. The Bank of England will then reduce the interest rates once more in order to encourage spending, and give business owners an incentive to take out a loan. The cycle of consumer spending and interest rates then repeats itself.
So to summarise…
The impact of low interest rates on small businesses is likely to be greatly beneficial in the short term. The cost of borrowing will be lower; meaning people looking to open a business will have more reason to do so. Consumer spending may increase which could then lead to businesses seeing more customers purchasing their product. While in the long term, inflation will rise and consumer spending will ultimately decrease. Leading to the Bank of England once again reducing interest rates, where the cycle will then repeat.
It is impossible to know exactly just how the economy will react to certain changes, but by looking at past instances where interest rates have remained low, it is possible to assume that the coming months look promising for small businesses.
This article was written by Mr Lender, a short term loan provider based in the UK.