Battling inflation leaves yet more bruises

August 4, 2022

It is no surprise at all that the Bank of England has announced the first 0.5 percentage-point jump in the official lending rate since it was granted independence from the government in 1997. Surging prices over the past two years have been a rude awakening for central banks. In the UK, Consumer Price Inflation could reach 15% by the beginning of  2023 and, far from being transitory, it is feeding through into wages as the need to meet higher bills is baked into households’ and firms’ expectations.

At the same time, business investment appears has been slowing steadily in step with rising input prices, following a government aid led post-pandemic recovery that was  faster than after the financial crisis. The Institute of Directors, a good barometer of UK companies, especially private ones, says its 69% of bosses are either very or quite pessimistic about the UK economy, while just 15% are optimistic about the outlook.

On the other side of the ledger, the world’s wish to save is unlikely to weaken. Even considering later retirement dates and the rapidly rising cost of care in old age, often funded by equity release or outright sale of a main property, the long term trend of ageing leading to more saving remains intact:  rising life expectancy prompts households to put more aside for their retirement and retirees tend to run down their assets slowly.

A plentiful supply of savings should therefore keep long term interest rates low by historical standards. However, between now and then the sharp and painful rise in rates will continue. The Committee for the Global Financial System estimates that 17% of companies in industrial economies are only being kept alive by low interest rates

Global debt has reached 355% of GDP, of which around two-thirds is private (not government) debt, making firms and households more sensitive to even small rate rises. There are few examples in history of central banks taming inflation without sparking a recession. The last time UK inflation fell from over 5% without a downturn was more than 70 years ago.  Fighting inflation is a battle not without casualties.

Small enterprises facing a debt crisis should seek professional advice on restructuring their borrowings, maintaining an effective dialogue with lenders and exploring constructive insolvency tools to protect their underlying businesses

Written by David Buchler, Chairman at Buchler Phillips, the UK’s leading independent corporate recovery, restructuring and turnaround firm.

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