PwC UK Preview: What impact would an interest rate cut have on business, industry and public sector?

As we await the Bank of England's decision on whether to lower or maintain the current interest rate of 5.25%, PwC experts discuss how a rate cut might affect various industry sectors - from consumer confidence, business borrowing and M&A, to local government finances and manufacturing.

Business and industry

• Economic overview

• Consumer markets

• Restructuring and insolvency

• M&A

• Private equity

• Manufacturing

Public sector

• Public sector finances

• Public sector infrastructure

An overview of economic sentiment

Chief Economist at PwC UK, Barret Kupelian, said:

“Economic theory states lower interest rates lead to cheaper borrowing costs, as a result helping propel spending across the economy. The prospect of lower interest rates in the UK in the backdrop of an extraordinary cost of living crisis and anaemic growth should therefore be welcome news. How households will react, however, is not as clear as what really drives their behaviour is their perception, rather than the reality, of the economic outlook. 

“The Bank of England/Ipsos latest Inflation Attitude Survey released in May, shows that a higher proportion of households think that interest rates are going to rise in the future relative to those who expect a fall (34% vs 27% respectively). In fact, around one third of households remain unconvinced that we have hit peak interest rates - they could therefore be reluctant to start spending more in the future. This suggests that one of the priorities of the new government should be to provide certainty and build confidence about the direction of economic policymaking and to paint a credible picture of what the economic vision is for the future. We will see a glimpse of what this looks like in the Chancellor’s first Budget at the end of October.” 

Business and industry

A potential boon for retailers, but limited consumer impact

Consumer Markets Director at PwC UK, Kien Tan, said: 

“Higher interest rates have had a less direct impact on consumer spending than the wider cost-of-living crisis. Compared with similarly high interest rates in the mid-2000s, more British households are now owner-occupiers, with fewer than 30% in England and Wales having mortgages. PwC's consumer sentiment survey highlights increased disposable income and financial security amongst retired and more affluent people, many of whom benefited from accumulating 'Covid savings' - leading to resilient spending patterns on items like holidays.

“Consequently, lower interest rates are unlikely to stimulate increased consumer confidence or spending as much as they might have done in the past. Households who are yet to come off legacy lower fixed rate mortgages will see a decrease in disposable income when remortgaging, with interest rates unlikely to return to previous lows. However, retailers are optimistic that lower borrowing costs could invigorate the housing market, thereby driving spending on significant home purchases such as furniture, appliances and DIY products, which have experienced subdued demand post-pandemic.

“A key group of low interest rate beneficiaries will be retail and hospitality businesses with Covid-era loans, which helped them weather enforced closures during national lockdowns. While these are underwritten by the government, higher interest rates have proven to be a millstone around the neck of many businesses, who will welcome the breathing space that lower interest rates afford.”

A double-edged sword for business stability

Head of Restructuring and Insolvency at PwC UK, Mark Addley, said:

“Everyone is waiting for interest rates to fall, leading to lower cost of debt, improved asset pricing and as a result, more deals happening. Whilst this in itself is positive, it also means that there could still be failures and insolvency appointments, as funders seize the opportunity to minimise losses and look to stop kicking the can down the road on debt repayments. History tells us that we tend to see insolvencies peak when we emerge from a difficult economic landscape. This can be as a result of a weak financial base from which to trade, such as lower cash reserves for working capital, as well as funders having increased confidence in exiting their position - which would have been less lucrative to do earlier.

“However, the restructuring landscape is evolving, and we are seeing a marked shift in businesses seeking alternative strategies to avoid insolvency. This is indicative of a broader trend towards proactive financial management, and a rate reduction will likely add some wind to the sails. Lower borrowing costs will enable businesses to refinance existing debt more cheaply, improving cash flow and providing the financial flexibility necessary for comprehensive restructuring plans. Enhanced investment opportunities may also arise, making capital investments and M&A activities more attractive, thereby strengthening market positions.”

Lower rates could ignite M&A

Global Head of Deals at PwC UK, Lucy Stapleton, said:

“Higher interest rates have impacted M&A activity over the past 18 months by increasing the cost of financing deals and causing valuation gaps to widen as sellers hold out for prices they consider optimal, while buyers wait for greater certainty before committing to transactions. 

“For the first half of 2024 deal values increased by 66% to £68bn (up from £41bn in the first half of 2023) despite the volume of deals seeing a fall of 20%. A reduction in the Bank of England base rate should create more favourable conditions for dealmakers, reducing the cost of debt and providing more confidence for those eager to deploy capital who will have priced in a potential cut to their plans.”

The potential to fuel more private equity acquisitions 

Private Equity Leader at PwC UK, Hugh Lloyd Ellis, said:

“A growing rumble of activity points to a large number of planned exits in the coming months. Recent inactivity, born of an unfavourable macroeconomic climate and a valuation gap compounded by 2021 entry valuation levels,  sees a number of assets reaching  (or even going past) desired levels of maturity. The challenge now will be to match vendor aspirations with the appetite of a cautious buyer group, who will be more focussed on clarity of value opportunity than ever before.

“Whether a drop in interest rates will have an effect remains to be seen. Most buyers will have ‘baked in’ current rates into their investment strategies and theses. Whilst a drop in rates might make acquisition more attractive, conversely the perceived improvement in affordability might see vendors hold firm on high valuations.”

A boost for manufacturers amid economic challenges

Manufacturing and Automotive Lead at PwC UK, Cara Haffey, said;

“The primary impact of reduced interest rates for manufacturers is undoubtedly the easing of capital requirements which are vital for investment into R&D, product portfolios, operational efficiencies and implementing new and emerging technologies. PwC’s executive survey undertaken with Make UK shows that nearly a third of manufacturers expect rebounds in activity if interest rates cool as the largest opportunity for their business in 2024 - showing the sector is hopeful that the easing of the economic landscape will be key in enabling growth. 

“The caveat remains in that the benefit gained from falling interest rates can vary depending on other factors, such as overall economic conditions, global trade dynamics, and government policy. New norms for input and commodity costs, still above their historic price trends, as well as considerable shipping and logistics disruption to key global trade routes, may mask much of the benefit manufacturers receive from any positive movements in inflation.” 

Public Policy

A catalyst for council investment and growth

Local and devolved government leader at PwC UK, Justin Martin, said:

“Councils, along with many households, will be busy calculating the effect of lower interest rates, in anticipation of a rate cut. Those with larger debt linked to the market will directly benefit from a cut in interest rates, and those with cash on hand may be tempted to deploy some short-term money management in capturing a better return on cash and liquid resources invested. It's premature to say whether movements in terms of public loan borrowing is worth it, but the best estimates see interest rates settling at around 3% by 2026, so some more strategic borrowing is likely to be viable once certainty around this direction of interest rate travel is observed. 

“The big opportunity from falling rates is the horsepower it lends to capital and infrastructure investment. Reducing regional inequalities and the enhanced distribution of investment is certainly made easier by falling rates and where councils invest its possible business and ancillary investment will follow. The indirect stimulus of cheaper borrowing might be felt by councils three-fold; by generating private investment; by more businesses paying business rates to councils; and council suppliers forgoing price increases as lower borrowing costs take some of the heat out of their cost of capital.”

A chance to rekindle push for private infrastructure funding

Public sector infrastructure partner at PwC UK, Zoe Watters, said: 

“The fall of interest rates will pour more fuel on the fire of the debate around the need to reintroduce private finance into infrastructure. The low rates of interest of recent years were potentially a missed opportunity to get infrastructure funded and moving forward in England. But the hike in rates over the last 18 months tempered any such debate with clear challenges regarding the value for money impact of high financing costs. 

“The drive for long-term stability in infrastructure planning and investment is critical. New PwC research reveals 66% of business leaders believe the UK is trailing behind competitor countries in its infrastructure and planning. However, with the Chancellor rowing back on infrastructure project commitments this week, there is a clear signal that the cupboard is emptier than expected and without private finance, there will be no infrastructure to drive the government’s growth agenda. Moving forward we expect a fall in interest rates will undoubtedly support the calls for a blended approach to financing much needed infrastructure across all sectors.”

ENDS