Interest rates may not be coming down soon

Businesses waiting for cheaper borrowing may need to reconsider their plans.

The Bank of England kept Bank Rate unchanged at 3.75% in September, but three members of the Monetary Policy Committee voted for an immediate increase to 4%.

The concern is inflation. UK inflation has moved above the Bank’s 2% target and higher energy costs are creating additional pressure. If those costs continue feeding through into wages and prices, interest rates may need to remain higher for longer.

For businesses, the important point is not to try to predict precisely what the Bank will do next. Instead, make sure that borrowing and investment plans remain viable under more than one interest-rate assumption.

A business considering new finance could prepare three forecasts. One might assume rates remain broadly unchanged; another could model a modest increase and a third could show the effect of rates eventually falling.

This can materially affect an investment decision.

A project that looks comfortably affordable if borrowing costs fall may leave little financial headroom if rates remain at present levels. On the other hand, an investment that still produces an acceptable return under a higher-rate scenario may be worth pursuing rather than waiting indefinitely for cheaper money.

Existing borrowing should also be reviewed. Businesses with fixed-rate loans approaching renewal need to understand what refinancing might cost. Variable-rate borrowing and overdrafts should be monitored because higher finance costs can gradually erode profit and cash flow.

The practical message is simple. Rather than basing decisions on hopes of lower interest rates, businesses should stress-test their plans.

Knowing what happens if borrowing remains expensive provides a much stronger basis for making investment and financing decisions.