UK manufacturers ‘fear even the smallest rise’ in interest rates

Posted on 22 Jan 2015 by The Manufacturer

UK manufacturers fear the impact of even the smallest increase in interest rates, despite base rates staying at their record low of 0.5%.

A survey conducted among nearly 400 businesses last month uncovered what researchers called “apparent hypersensitivity” to a small hike in the current rate.

Th research concluded that an increase in interest rates of up to 1.5% would have a “tangible impact” on 44% of businesses polled.

Trevor Williams, head of credit and surety Europe at business insurance firm QBE, which carried out the survey, said: “Our research reveals a marked sensitivity in the manufacturing sector to even the smallest increase in interest rates.

“In particular, companies expect their working capital and the creditworthiness of their customers to be impacted.  The closing of 2014 and the first days of 2015 have seen a number of high profile business failures and profit warnings.”

Williams said that with renewed uncertainty about the timing of the first base rate increase, businesses in the sector are nevertheless bracing themselves for more pressure on their balance sheets; 51% said they would have to take a more cautious approach to spending, while 49% said they would have to increase scrutiny on levels of working capital and cash flow.

In addition, more than a third (38%) said they would expect to see increased trade credit risk within their own customer base.

“Further weakening of the UK’s major trading partner, the Eurozone, coupled with downgrades of our own economic growth forecasts, demonstrate the continued fragility of the recovery,” Williams said.

“Margins continue to be squeezed and payment terms extended, leaving businesses susceptible to being starved of cash,” he added.

Meanwhile minutes from the last meeting of the Bank of England’s Monetary Policy Committee (MPC), which took place earlier this month, revealed that consensus on rates remaining at the current 0.5% level had returned.

After months of at least one member of the MPC calling for an increase, the minutes reported: “The committee judged that the lower oil price would, if sustained, act as a stimulus to growth in the UK and its main trading partners via its effect on the costs of production and real incomes.

“It was possible that the risks to CPI inflation in the medium term might have, if anything, shifted to the upside, but all members were also alert to the downside risk of current low inflation becoming entrenched.”