Higher interest rates and elevated prices have thrown a wet blanket over UK business optimism, according to surveys out today.
Confidence as measured by the lobby group the Institute of Directors (IoD) was largely unchanged last month at minus 30 points, up marginally from June’s minus 31 point reading.
It solidifies signs that pessimism is setting in among firms, as first indicated by the IoD’s June index, which fell from just minus six in May.
“With inflation proving more persistent than was previously expected, and more firms starting to experience the negative impact of rising interest rates, there is a greater sense of caution in the air than in the spring,” Kitty Ussher, chief economist at the IoD, said.
Although inflation is expected to keep falling throughout this year to around five per cent by Christmas, core inflation – which removes volatile food and energy prices and is seen as a more accurate measure of underlying price pressures – may prove harder to tackle.
The Bank of England has already lifted interest rates 13 times in a row, which is reining in business exuberance.
A separate survey from Lloyds Bank out today shows “UK business confidence dipped by six points to 31 per cent in July, with nine out of 11 regions and nations reporting a lower confidence reading month-on-month”.
Optimism is poised to slip further in the coming months as the Bank continues to pump up borrowing costs, starting this Thursday with an expected 25 basis point lift to a fresh 15 year high of 5.25 per cent.
The UK’s official interest rate is projected by money markets to reach a peak of 5.75 per cent. Cuts are not expected until late next year.
Tighter monetary policy is designed to knock business spending by making it more expensive to borrow. It also reins in consumer demand by raising savings rates which, taken together, should help to bring down inflation.
The Bank of England has not hit its two per cent inflation target since July 2021.