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UK business optimism at 18-month high as hope interest rate hikes will be paused


In recent times, UK businesses have exhibited the highest level of confidence since before the Russian invasion of Ukraine, according to a new survey.

The most recent survey by Lloyds Bank reflects an unexpected surge in business confidence. The Business Barometer measure of confidence leaped by 10 points in August, hitting a score of 41%. This is the highest it has been since February 2022, pre-dating the invasion of Ukraine by Russia.

Interestingly, this increase in business confidence contrasts with other signs of economic slowdown. Last week, a measure of business activity in August plunged to its lowest level since January 2021. This raises questions about the robustness of the UK economy and the sustainability of this buoyant business sentiment.

Senior economist at Lloyds Bank, Hann-Ju Ho, said that businesses seemed relieved at the prospect of interest rates reaching their peak. Furthermore, there is an apparent optimism that measures to combat inflation are yielding results. The Bank of England has raised rates 14 times consecutively, aiming to counter an inflation rate that is nearly 7%.

According to Thursday’s survey, businesses’ hiring intentions were the strongest in 15 months. Additionally, an unprecedented number of firms are planning to raise staff wages, with the highest percentage since Lloyds began asking about pay in 2018.

The Lloyds Bank survey also highlighted that smaller firms were more optimistic than larger ones. This disparity can be attributed to the latter’s higher exposure to the global economy. Furthermore, manufacturing firms were reportedly more pessimistic than other companies, reflecting the sector-specific challenges they face.

The Bank of England has played a crucial role in shaping the UK’s economic trajectory. Its recent decision to increase interest rates for the 14th time in a row is a testament to its commitment to counter high inflation. However, the modest increase of a quarter-percentage-point was smaller than June’s 50-basis-point hike, indicating a possible approach towards a peak in interest rates.

Amidst the prevailing economic climate, financial institutions are also making strategic moves. Nationwide building society, for instance, has reduced the cost of its fixed-rate mortgage deals for new customers. This move reflects the institution’s response to the fall in swap rates, and the stabilisation of economic conditions.

Similarly, other lenders such as Barclays, NatWest, and Santander have also reduced fixed rates on selected mortgage deals. This trend offers hope to borrowers, hinting at the possibility that home borrowing costs may have reached their peak.

Expectations about future interest rates vary. Investors largely expect the Bank Rate to reach its peak at 5.75% this year, up from its current level of 5.25%. However, if inflation does not significantly decrease, the Bank of England may need to increase the Bank Rate further.

In the housing market, Deutsche Bank has forecasted a further 3% fall in average house prices over the remaining months of the year. This predicted fall would result in an annual decrease of 7%, signalling a potential correction in the housing market.

The resilience of the UK economy is evident in the face of global events and domestic challenges. The unprecedented business confidence, despite signs of an economic slowdown, underscores the adaptive nature of UK businesses.

As we look to the future, the trajectory of the UK economy will be influenced by numerous factors. These include the Bank of England’s interest rate decisions, global geopolitical events, and domestic economic policies. For now, however, UK businesses appear to be seizing the moment, demonstrating an optimism that bodes well for the nation’s economy.

Sarah Austin, founder and Director of the www.britishbusinessexcellenceawards.co.uk, commented: “The Lloyds Bank Business Barometer reflects the same positive conversations that we are seeing take place across the British Business Excellence Awards. Brands and company owners are saying that they are finally seeing the green shoots of recovery beginning to emerge across the business landscape. It is clear though, that the UK business economy is still on a knife-edge and unless those green shoots of recovery are carefully nurtured, they could quickly get blown away by the winds of inflation and the danger of fuel price rises that are starting to creep back in.

“The Treasury, Bank of England and Downing St need to work collectively to ensure we continue this return to optimism about the future.”

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