But one thing that has remained resolutely static since then is the base rate of interest, as set by the Monetary Policy Committee of the Bank of England (MPC). It’s been at 0.5% – the lowest it can be – for over five years.
The reasons for this are numerous. Along with government bailouts for some banks, a low base rate helped major financial institutions from going to the wall. It also helped households (who were struggling with debt themselves) survive by keeping the cost of repaying loans and mortgages relatively low.
Businesses were meant to benefit too. “The purpose of low interest rates wasn’t just to save banks. The Bank of England had a macro-economic plan: if rates were low, then banks would lend and companies would invest. But banks aren’t lending,” says Ismael Erturk, senior lecturer at Manchester University Business School. In fact, according to figures published by the Bank of England, the total amount of money loaned by banks to SMEs in May 2014 was down 2.8% on the previous year to £170.3bn.
However, banks’ reluctance to lend is part of a bigger picture. “Banks are in the business of making a quick profit – and lending to SMEs doesn’t do this. But small companies also don’t want to borrow, because they don’t know what the banks will do next,” says Erturk.
In addition, businesses have been repaying debts rather than taking on more, and there has also been a rise in alternative methods of raising finance.
Erturk is sceptical of whether the base rate is an effective way of managing the economy at all. “I’m very critical of Bank of England policy,” he says. “Instead of having an industrial policy and making reforms, government lets the central bank use this crude interest rate tool.”
Stable base
That said, five years of low rates have, on the whole, provided pretty benign conditions for the print trade, and firms who have managed to get finance from banks have been able to get their hands on some favourable rates. “The great thing about the past five years has been stability, as it has given printers the ability to plan,” says BAPC president Sidney Bobb.
It’s a sentiment that Laurent Salmon, group finance director at Sunderland-based print group Paragon, echoes. “Low interest rates have, on balance, been
beneficial for Paragon,” he says. “It means we have been able to lock in attractive rates for financing to support investment and acquisitions.”
But all good things must come to an end. With the economy showing signs of dragging itself out of its lengthy fug, and a housing market that is in danger of overheating (particularly in London and the South East), change is in the air. There’s a very strong possibility that the MPC’s panel of senior economists and bankers, led by Bank of England governor Mark Carney, might decide that the rate needs to rise soon, in order to cool off the housing market and prevent a return to the excesses of the pre-crash days. At the end of June, Carney said that average interest rates would rise five-fold to 2.5% over the next three years. It now looks like it’s a matter of when rates rise, not if.
The knock-on effect on the financial matters of individuals – personal loans, mortgages, credit cards and so forth – are usually the issues that get discussed whenever the topic of a change in the base rate of interest comes up. But the repercussions for smaller printers could be huge. The BAPC’s Bobb is under no illusions about what the rise might mean for the trade. “A rise would be a disaster,” he says. “Costs will go up. Printers usually absorb price rises, but margins are already low, and print is cheaper for customers than ever before.”
Aside from loans getting more expensive to service, there are potential implications for the order book, too. One of the principal reasons for keeping a base rate low was to stimulate economic confidence and consumer spending. With many printers dealing in advertising and promotional materials, or consumer items that fall into the ‘discretionary spend’ category, a base rate might mean a blow for trade as well.
“Customers will have less money than ever as well,” says Bobb. “Even though print is, at times, recession-proof, it does suffer. Customers will be looking at their spending and see that it’s cheaper to send out 10,000 text messages than it is 10,000 brochures, even though it might not be as effective.”
For printers worried that a base rate rise might affect repayments on existing debt, the message is clear: start planning now. “If your mortgage goes up and your income doesn’t, what do you do? You do anything you can to save money,” says Bobb.
The Federation of Small Businesses director John Allan advises: “For those struggling to meet repayments, our message is to take advice and talk to your creditors. Should they not want to do that, we would advise talking to an independent body that offers free, impartial advice and is regulated by the Financial Conduct Authority, such as the Business Debtline.”
Fixed opportunities
It doesn’t take a genius to work out that the deals being offered by banks won’t hang around forever, so now might be the time to investigate fixed-rate deals if your business has investment plans in the pipeline.
However, the mood from the wider community of smaller businesses remains bullish. It’s business as usual for most, reports Allan, with businesses borrowing and investing according to when it suits them rather than when they think interest rates might be most favourable.
“At this point, there is little to indicate our members are expecting a rise in interest rates, or, if they are, that it is affecting their investment decisions,” he says. “Our latest research shows more than a quarter of small firms expect to increase investment in their business over the next 12 months, with small businesses in all sectors displaying high levels of confidence.
“On borrowing requirements, the trend has been for businesses to repay their outstanding facilities and we expect that to continue. However, should interest rates rise, the key for firms’ investment and borrowing intentions will be for that rise to be on a gradual basis – a sharp rise would knock back the hard-won confidence that has returned to the economy in the past year.”
Paragon’s Laurent Salmon believes that the firm is in a good position to weather the storm of a potential rate rise. “For Paragon the impact of a rate rise would be limited,” he says. “We have long-term credit facilities in place and access to international credit markets where rates are expected to remain low for longer than in the UK. For UK printers generally, the impact could be quite negative, with leasing costs and bank lending becoming more expensive. However if credit becomes more available, even if it is more expensive, that will be a positive.”
So, when might a rate rise happen? Unfortunately, predicting this is an inexact science, especially given the mixed signals over the past year or so.
“It’s difficult to say when a rise might come,” says Ismael Erturk. “We’re getting confused messages from the Bank of England. In December last year, the message was that they would keep rates low. Then, earlier this year, markets were expecting a rise, but the MPC decided that it would use methods other than a rate rise. The general expectation is that rates might rise in six months’ time to a year,” he continues. “But it doesn’t just depend on what happens in the UK – it’s about what happens in the EU too. The UK doesn’t want the pound to appreciate, because of the export market.”
So while Carney has hinted at a rise, the Bank of England knows it has a fragile recovery to protect. Carney confirmed as much in June: “The big picture is not whether the Bank rate goes from half a per cent to slightly above that lowest ever level. The big picture is where interest rates go over the medium term, because, if I’m thinking about investing in a new plant, if I’m thinking about hiring people, that’s what I care about – those are the debts I have to service.
“Our responsibility is to protect against major risks that can develop over time that can tip what is a promising economic expansion back into a recession,” he continued. “This is an economy that has just come out of the worst recession in modern history, that is still relatively vulnerable. What’s happened in the recovery is that it has proceeded even better than we had expected.”
Clearly, there are some big decisions to be made. So let’s just hope that Carney can demonstrate the sound judgement and fiscal nous to justify that reported £624,000 annual salary...
