Brexit and SMEs: All change…except Base Rate
14th July 2016 by Malcolm McGready
Since the result of the Brexit vote wrong-footed financial markets and politicians alike, we have seen a period of dramatic change.
The UK now has a new Prime Minister and cabinet to lead the country through the Brexit negotiations. Boris Johnson’s political career has not escaped the ups and downs of the past few weeks as he emerged as Foreign Secretary after standing down from the race to become the new Prime Minister. Bringing back stability to the Government has brought some calm and optimism back to markets.
The FTSE 100, after suffering an initial decline following the Brexit vote, has more than rebounded. Of more relevance to more UK centric businesses is the FTSE 250 which still has some ground to make up reflecting the fact that, while there are indeed opportunities for SMEs, there are shorter term challenges which are playing themselves out in real time.
On Thursday the Bank of England’s Monetary Policy Committee (MPC) announced that the base interest rate would remain at 0.5%. Many commentators expected a reduction to 0.25% to provide a stimulus to business. Some banking colleagues I talked to thought this unlikely as it’s a policy measure the Bank will want to keep in reserve as the post-Brexit economic situation crystallises. The Bank did signal it was contemplating a loosening of monetary policy in August which could include other policy measures such a quantitative easing.
While the prospect of lower interest rates will benefit many businesses, there are also those who have rebuilt their balance sheets since 2007 and are in a cash positive position. Seeing the meagre returns on these deposits fall further may prompt some of these businesses to consider alternative courses of action.
In the short term, the exchange rate has had a considerable effect on SME’s. Many commentators point to the benefit for exporters of the reduction in value of sterling post referendum. However, to the many SME importers with immediate foreign exchange needs this is cold comfort. The MPC’s decision on interest rates provided some upward momentum in the value of sterling which provides some limited relief to such companies.
Indicators of business and consumer confidence are generally showing a degree of pessimism with investment and recruitment decisions being postponed. This is an understandable reaction when faced with such an uncertain situation and will no doubt have further consequences in the coming months which could be a drag on the performance of SME businesses.
With a new Government the United Kingdom can now start working to develop and execute its Brexit plan which is urgently needed so that we can really understand what Brexit will look like and adapt accordingly.
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