The Bank of England’s (BoE) recent decision to leave interest rates unchanged for the first time in 14 months has been welcomed by parts of the business financing sector and may signal renewed concerns about anaemic UK growth.
On 21 September, the nine-strong rate-setting BoE Monetary Policy Committee voted by a narrow margin of 5-4 to keep the Bank Rate at 5.25%.
Earlier, forecasts predicted an increase in the inflation rate, alarming financial markets and painting a dire picture for those hoping to see the central bank ease monetary policy.
However, a change of thinking occurred when official data revealed an unforeseen decline in the Consumer Prices Index to 6.7%. This development allowed the BoE to await additional data to gauge the effectiveness of the rate hikes that have been implemented thus far. The private sector, although cautious to not celebrate too soon, appears to back the central bank's decision.
Following the interest rate decision, Andrew Bailey, the Bank's governor, issued a warning against talk of rates going down anytime soon, saying they will remain where they are, and perhaps go higher, "to ensure we get the job done".
Andy Mielczarek, founder and CEO of SmartSave, a Chetwood Financial company, said the fall in inflation "defied expectation and has released pressure on the Bank of England, allowing for its decision to hold interest rates.”
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Some economists welcomed the change of fortune for the UK economy but warned that inflation remains high and people and businesses are still adapting to the existing interest rate regime.
Growth versus inflation
Crushing economic growth, and not inflation, is “the real danger” in the UK and should be the focus of the Bank of England, warns the CEO of one of the world’s largest independent financial advisory, asset management and fintech organisations.
Nigel Green, CEO of deVere Group, spoke out after US-based economist Nouriel Roubini told Bloomberg that the BoE and the European Central Bank (ECB) need to keep raising rates to ward off stagflation, which occurs when stagnant growth and high inflation happen simultaneously.
Roubini reasoned that oil prices remain stubbornly high and that talk of easing monetary policy is premature. Compared to the US Fed, the ECB and the BoE face a bigger dilemma because prices in Europe and the UK are still going up fast while growth is slowing, he said.
Green of deVere said: “Crushing already slowing global economic growth through the blunt instrument of monetary policy will be significantly more detrimental to an economy than short-term stagnation. While neither extreme is ideal, hindering longer-term economic growth is the real danger, not short-term stagflation, and it should be the focus for policymakers.”
Inverted yield curve
A growing number of analysts are also warning of signs of a possible looming recession in the UK in the form of the inverted Treasury yield curve.
Over the past 6 months, the gilt yield curve has been the most inverted since the 2000s, meaning bondholders want more compensation for lending over a two-year horizon than over ten years and beyond.
According to some analysts, the inverted yield curve in the UK suggests a recession may be looming because it’s a sign of a tight credit market and weak economic growth. On Friday 22, adding to the evidence of recessionary symptoms in the UK, Bloomberg reported: “Britain’s private sector companies shed workers at the fastest pace since the pandemic and the depths of the financial crisis.”
For these reasons, the decision by the BoE to halt its nearly two-year-long series of interest rate increases may indicate a softening of its outlook, from solely worrying about inflation to factoring in recessionary fears in the UK.
What does this mean for asset financing?
Simon Goldie, Director of Business Finance & Advocacy at the FLA, believes that, regardless of the economic situation, the fundamental function of providers of asset finance remains the same: “Whether interest rates go up or down, their focus is on providing finance for the customers that need financing to get equipment”.
Although their mission is unchanged “it is obvious that the bank’s decision on rates has an impact ... because it’s about their cost of funding. What the customer is charged is assessed on the basis of credit and asset risk, the interest rate plays a part in that,” he added.
Times are tough for businesses in the UK, but Goldie is convinced “the asset finance sector is very robust.” Indeed, figures released in September by the FLA show that total asset finance new business (primarily leasing and hire purchase) grew in July 2023 by 14% compared with the same month in 2022. In the seven months to July 2023, new business was also 14% higher than in the same period in 2022.
In the car finance sector, new business was up in July by 59% compared with the same month in 2022. The business equipment finance and commercial vehicle finance sectors reported new business growth of 15% and 12% respectively, over the same period.
Asset finance also remains a popular means for SMEs to seek funding. According to the UK government-owned development lender the British Business Bank, of the BBB's repayable finance arrangements, asset finance is most likely to be used (22%) narrowly ahead of overdrafts and bank loans.
What makes asset finance robust in times of economic uncertainty and high inflation? Goldie attributes this to two factors:
“One is about working capital. By using a lease, you are able to use capital for other things, as opposed to tying up all your cash in an asset through ownership. That is always a given regardless of the economic situation. The second is predictable cashflows, you can manage your cash flows better”.
“The asset finance serves the SME and mid to large corporate community very well and will continue to do so”, he concludes.