Are Interest Rate Rises Squeezing Working Capital?
In its battle to control and reduce the rate of inflation, the Bank of England has increased interest rates for a 13th consecutive time. Already at its highest level for nearly 15 years, rising interest rates are continuing to apply pressure on finances both at home and in businesses. Despite the Bank’s efforts, although slightly reduced from 10.1% in the year to March 2023, inflation remains stubbornly high at 8.7% being both above the widely forecasted figure of 8.2% and significantly above the Bank’s target of 2%.
Interest rate rises always take centre stage across major media platforms and significantly more so in times of economic distress. Aside from the obvious concern of mortgage rates, which always hits home the hardest, businesses across the economy will be facing increased pressures across their lending facilities as they attempt to meet financial covenant requirements and continue to service existing debt. Pressures may be further increased on companies that have enjoyed the cheap price of borrowing over the past 15 or so years and have now over-leveraged relying entirely on refinancing for survival. This exposure to fluctuating interest rates, whether faced by over-leveraged companies or not, poses additional questions and challenges upon business management across the economy.
Yet despite these additional pressures and challenges on businesses, and notwithstanding several economic opinions that businesses and households cannot sustain further rises, the Bank may continue to raise interest rates further as it continues the battle against inflation. The question facing businesses now is how to manage capital through this difficult economic environment and how to keep capital working. Our latest Insight considers this question, highlighing points and practical steps for directors to consider to help ease pressure on cash flow.