Back in 2010 the UK inflation rate was over 5%, base rates were at 0.5%. If base rates were only about inflation then you should have seen an increase, however we all know that at that time things were somewhat more uncertain and the world economy was, to say the least, complicated and fragile.
This month UK inflation has fallen below 0.5%. With oil prices falling then inflation could dip lower. Remember that even if oil prices stabilise, most of these reductions are yet to be passed on, there is a lag between oil prices falling and the consumer seeing the benefit in energy costs.
There is very little certainty in economics. I remember HSBC’s senior economist once telling me that in economics you never make a forecast and give a timescale, always one or the other. As soon as you do both you will fail, do one then you will always be proved correct in the long run.
I guess this is what the BOE is doing. They are saying interest rates will rise at some point. They are saying that deflation may happen at some point. They are saying that things will change over the next 12 months, but not saying what.
If you want to learn anything from economic commentary then look between the lines, you will rarely find the answer within the text itself.
For UK SMEs the outlook is a little uncertain. By all means be cautious, but remember that the one thing that the BOE is saying is that any changes to interest rates will be gradual and slow. If low inflation, continued lower interest rates and oil prices stay where they are then it may be a good time to make that expansion, borrow those funds and finance that growth.
By Dave Farmer
Dave Farmer is founder of the award winning business finance specialist Lime Consultancy. Lime Consultancy are a Sussex based commercial finance expert.
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