British venture capitalist Jon Moulton says the success of the UK economy this year will be decided by interest rates, adding that a base rate of 5 per cent ‘could occur’ within 12 months because of soaring inflation.
British venture capitalist Jon Moulton says the success of the UK economy this year will be decided by interest rates, adding that a base rate of 5 per cent ‘could occur’ within 12 months because of soaring inflation.
Moulton, who founded business turnaround specialist Better Capital in 2009 after leaving Alchemy Partners, joins a chorus of industry leaders and analysts who fear a jump in interest rates, caused by record inflation, will hamper the economic recovery.
He tells GrowthBusiness interest rates will rise. ‘2011 is all about interest rates. If interest rates rise rapidly, possibly because of a sovereign issue, then a double dip will occur, because we have a very highly indebted consumer.’
Moulton adds: ‘The capital gearing of UK companies is actually near a 30 year high. So if interest rates rise, it will be a shocking year in the economy this year.’
Asked if he thought rates will rise 1 or 2 percentage points, he replies: ‘You’re an optimist. How many months in the past 30 years have they been below 4 per cent? The answer is 24 months, the past 24 months, so you know 1 per cent which sounds terrifying, is actually historically, almost unprecedented.
‘What could rates go to? I don’t know. It is not an absurd thing to imagine interest rates at 5 per cent in a year’s time. It could occur.’
Moulton argues that inflation is increasingly becoming a problem. ‘If we don’t put the interest rates up, you will gradually see the currency go to hell. And then of course, inflation starts to get imported too. It tends stoke itself rather unpleasantly.’
In a shock to the market this week, the Office for National Statistics announced the annual rate of inflation, as measured by the consumer prices index, jumped from 3.3 per cent to 3.7 per cent. Experts had predicted a more modest rise of 0.1 per cent.
Adding to the pressure already on the Bank of England to lift rates above the current 0.5 per cent base, prices rose 1 per cent between November and December – the biggest month-on-month increase since records began in 1996. The bank will next meet to decide rates on 10 February.
Andrew Smith, chief economist of KPMG UK, calls for interest rates to be left unchanged despite the spike in inflation. ‘We’ve seen a year of recovery in the economy but I think most people take the view that it’s still pretty fragile. Output is still well below its previous levels, unemployment’s a lot higher than it was. At the moment it looks sensible to keep interest rates as low as possible.’
David Hall, managing director of private equity firm YFM, one of the country’s largest investors with 250 concerns, says rising interest rates will have a double effect on business. The cost of borrowing will increase, and finance will remain constrained because institutions will factor in the rising cost when assessing credit applications.
Says Hall: ‘At the moment, the interest rate burden on businesses is very low. If interest rates suddenly start to jack up that is actually putting a lot more pressure on those businesses.
‘Bank finance won’t be coming back to the levels we want either. It will be staying up on very tight terms, which means that you will still see bank finance available, but not in the same capacity as before, and probably at slightly more expensive prices.’
