Talk of interest rates has been pronounced in recent times, as Wales and the rest of the UK continues to struggle with the fall-out from the Brexit vote. After all, the Bank of England (BoE) has sustained an ultra-low, base rate since the June referendum, as a way of combating increased volatility and driving quantative easing.

The process of maintaining artificially low interest rates is one that continues to draw controversy, particularly as it is part of a wider strategy that sees electronic money used to uphold the economy and financial markets. It is even more problematic at present, as inflation continues to rise at a rate that is disproportionate to interest.

What Does This Climate Mean for Welsh Businesses?

Of course, such a scenario can have an extremely negative impact on households, as many of the UK's banks are now offering interest rates that are lower than the prevailing inflation rate of 0.9%. This is leading to negative returns, making it hard for individuals to optimise their income and savings over time?

While this is concerning for households and savers, it also has a huge impact on businesses. After all, consumer spending has not yet been adversely affected by sustained economic uncertainty in the UK, means that this remains a key engine for growth at present. Despite this, the imbalance between inflation and interest rates is beginning to hit the spending power of customers hard, creating a scenario where households will reinvest less into the economy and business revenues will fall as a result.

As if this was not enough, there are further consequences that could unfold during the next financial quarter and beyond. One of this revolves around Brexit, and the increased likelihood that PM Theresa May will trigger Article 50 in March. If this were to happen, the prevailing economic climate would most likely see the cost of importing and manufacturing goods rise in Wales, which in turn would cause prices to rise online and on the high street. This would trigger a further decline in the level of consumer spending, while potentially causing the economy to stagnate.

We may also see consumers turn to borrowing as a way of counteracting this, particularly with low interest rates reducing the cost of securing personal, unsecured loans. This type of borrowing could therefore become a short-term driver of the economy, at least until a greater balance can be struck between interest rates and inflation in the UK.

The Last Word

All things considered, it seems highly likely that the BoE will be forced to hike interest rates during the next six months. We are already expecting to see the Federal Reserve increase interest rates in the U.S. next month, and this will set an interesting precedent that we are likely to follow.

So even though the pace of inflation growth is diminishing, it remains disproportionately high to the rate if interest in the UK. This will compel the BoE to take decisive action, particularly as it looks to increase consumer spending power and leverage this as a driver of economic growth.