Hopes of an interest rate cut before the end of the summer?
Last week (22nd May), although the UK’s headline rate of inflation fell from 3.2% to 2.3% (the lowest level since July 2021), the fall was a little less than expected. In addition, the decline in core inflation (which excludes volatile food and energy prices) was modest, whilst the figure for the services sector only fell from 6% to 5.9%. Putting all these figures together, the result was a dampening of expectations of an interest rate cut in June.
However, the next day (23rd May), the latest PMI Survey data was a little more encouraging overall, with the manufacturing sector picking up to offset a slight decline in the services sector leading to some renewed optimism that the Bank of England will still cut interest rates this summer, albeit in August rather than June, something that businesses are desperate to see.
The Purchasing Managers Index is compiled by S&P Global, and is an indication of prevailing business conditions in the Private Sector, based on a survey of key indices, including: business output, new orders, employment levels, costs, selling prices, exports, purchasing activity, supplier performance, etc. A figure of above 50 indicates growth and a figure below 50 indicates economic contraction.
The overall figure for the UK in the May data was 52.8, down from 54.1 in April, with the City expecting 54. This shows that although the Private Sector economy is still growing, it is doing so at a slower rate. The GDP figure for Q1 2024 was +0.6%, whilst the figure, so far, for the 2nd quarter looks to be heading for growth of 0.3%.
The PMI figure was driven by sluggish growth in the services sector, where the PMI index fell from 55 in April to 52.9 in May. The data shows that this was caused by on-going cost of living pressures and continued high interest rates.
Conversely, the manufacturing sector had its best month for nearly two years, with the figure in May being 51.3, an improvement from 49.1 in April. The key drivers for this were increased overseas demand for manufactured goods, especially from Europe.
The survey also showed that businesses raised prices at the slowest rate since February 2021, with input prices rising at the slowest pace on seven months.
So, although the outcome of the inflation data and the PMI survey data is mixed, it still led Andrew Wishart, senior UK economist at Capital Economics to say that the survey…
“…suggests that the Bank will be able to press ahead with a first cut at the August meeting.”
The effect of high interest rates on Businesses
High interest rates make loans more expensive and harder to take out, making investment decisions harder and therefore dampening growth. Equally, they increase the cost of repayments on loans, making life harder for many thousands of businesses, who were already struggling with their finances post Pandemic and as a result of the cost of living and energy increases.
Business Matters Magazine reports that British Businesses are bracing for a debt crisis as high interest rates are predicted to cost an additional £41.7 billion by the end of the decade. So, although businesses will welcome the start of interest rate reductions as soon as possible, the debt hangover from high interest rates will be around for many years to come.
As Insolvency Practitioners, we are here to help businesses when it is not business as usual. When approached by businesses facing financial difficulties, our first priority is to see if we can help them to survive, either helping them find access to new and affordable finance, for example, or through formal insolvency turnaround procedures, such as a Company Voluntary Arrangement or an Administration. Only of there is no realistic prospect of saving a company will we recommend a Creditors’ Voluntary Liquidation (CVL).
The earlier our Insolvency Practitioners are appointed, the more we can do to help.Hopes of an interest rate cut before the end of the summer?
Last week (22nd May), although the UK’s headline rate of inflation fell from 3.2% to 2.3% (the lowest level since July 2021), the fall was a little less than expected. In addition, the decline in core inflation (which excludes volatile food and energy prices) was modest, whilst the figure for the services sector only fell from 6% to 5.9%. Putting all these figures together, the result was a dampening of expectations of an interest rate cut in June.
However, the next day (23rd May), the latest PMI Survey data was a little more encouraging overall, with the manufacturing sector picking up to offset a slight decline in the services sector leading to some renewed optimism that the Bank of England will still cut interest rates this summer, albeit in August rather than June, something that businesses are desperate to see.
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