The Daily Telegraph reported that in May 2022 inflation is up to 9.1pc, a new 40-year high. Economists at Citigroup predict the probability of a global recession now to be 50%. It certainly looks like turbulent times ahead with a change to interest rates.
Inflation and Interest Rates
So, with inflation increasing rapidly, what’s the bearing on interest rates? Well, the Bank of England’s target inflation level is 2%, so it’s way off the mark. Increasing the base rate is like a lever for slowing down inflation. The theory is, that by raising interest rates people should have less money to spend. Prices should therefore come down as there’s less demand and that should slow inflation down. This sounds like a reasonable plan, but history teaches us that it may take a while for that to happen. There are often other factors that can affect this.
Since December 2021 the Bank of England have increased interest rates at every one of their monthly meetings and these rises are being passed on through the lending community. Lenders are jockeying for position to attract business but there’s only one way that rates are heading and that’s upwards.
According to the BBC News website, analysts Capital Economics think that the Bank will ultimately have to lift rates to over double what they currently are, so brace yourselves, the cost of borrowing is to increase further.
Whether it’s mortgages, loans, or asset finance, the cost of borrowing is quickly rising and it’s not finished yet.
Fixing rates as soon as possible could be a prudent decision. It may be an idea to consider accelerating buying decisions for business assets to lock into cheaper interest rates. If you fix the rate, your monthly payments do not change, even if interest rates continue to rise.
Another incentive to bear in mind when considering accelerating asset finance deals is the Super-Deduction allowance.
Super-D is the most attractive tax incentive for business investment ever offered by the British government. Companies can claim back up to 25p for every pound invested in ‘qualifying’ machinery, commercial vehicles, and equipment as long as it’s before 31st March 2023.
With regard to Commercial Mortgages, many Lenders still offer Fixed Rate products. Locking in your rate & cost of funds on a 3, 5, or 10-year term can provide borrowers with a certainty of fate on monthly repayments during these uncertain times. Anyone on a variable rate should consider fixing their rate now before rates rise further. This should also go for anyone who is about to finish a fixed rate term. Many fixed-term deals switch to variable-rate when the fixed term ends. So, it may be wise to plan ahead and seamlessly switch to another fixed-term deal. Any delays may cost you money.
A comment from PMD
Tom Brown, PMD Director commented: “We have a huge panel of lenders and we’re seeing all of them increasing rates in line with Bank of England base rate. Their wholesale cost of borrowing is steadily rising. It’s inevitable that this will continue for some time and anyone considering borrowing in the future will have to factor higher rates into their forecasts. If you can accelerate buying programs now and lock into cheaper rates, this may well prove to be a sensible strategy.”
TB added: “The threat of a recession compounded by rising interest rates not only impacts upon the cost of funds. It can also restrict the availability of credit with Banks / Lenders taking a more cautious approach to credit risk, even more reason to engage with PMD who have access to the whole market, helping to unlock the funding that you need to grow and prosper.”