What now for Base Rate?

A survey of 55 analysts from UK financiers suggests a rise in base rate to 1% in Q4 this year, followed by 0.5% increases each subsequent quarter; seeing 2.5% by Q3 2011.

The survey was conducted by Reuters on 7th January this year and what is striking is that whilst there is wide disparity around “when” and by “how much” rates will rise, there  is unanimous consensus that significant increases are just around the corner.

I have highlighted margin increases in previous blogs (the average margin increased by 0.4% in just the three months of August to November ‘09 according to the Bank of England) and common-sense suggests that businesses should ensure they budget realistically for the cost of finance going forward. A business facing average interest costs for working capital at circa 2.5% could conceivably face 5% within 15 months – a doubling!

Certainly in finance related projects that we have concluded in Expenses Reduction Analysts over the downturn, the emphasis has been on reducing processing costs whilst containing borrowing costs. Mainly this is because bank managers have become painfully aware of their own true “cost of funds” but the better ones – the ones who take a long-term view of relationships – recognise that concessions can be made elsewhere.