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Home » UK Firms ‘Slow Output and Rein in Hiring as Borrowing Costs Rise’

UK Firms ‘Slow Output and Rein in Hiring as Borrowing Costs Rise’

by Freddy Evans
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Survey of businesses gives further indication that Bank of England could limit future interest rate rises

Businesses are pulling back on hiring and slowing their output under the strain of rising borrowing costs, according to a study that gives a further signal that the Bank of England could limit future interest rate rises.

A modest pickup in manufacturing in August failed to prevent a slowdown in broader UK private sector economic activity, a survey of businesses by the accountancy firm BDO found.

City traders have cut their expectations for further interest rate rises. They forecast that the central bank will increase interest rates by 0.25 percentage points to a peak of 5.5% when its monetary policy committee meets on 21 September.

The Bank has repeatedly raised interest rates in an attempt to reduce inflation but is now expected to curtail this tactic in the face of a weakening economy.

Expectations for policy tightening by the Bank are now their lowest since June, after a string of surveys this week showing a softening outlook for inflation, and the governor Andrew Bailey’s comment that a peak in rates was “much nearer”.

Labour market data released on Tuesday is likely to show the jobs market slowing, with unemployment rising for a third consecutive month and employers cutting the number of job vacancies.

BDO said its survey brought together all the main business surveys into a single index, where a figure above 95 indicates expansion.

“The effects of tighter monetary policy from the Bank of England are being reflected in the labour market,” the report said, adding: “The employment index fell for its second consecutive month, dropping by 0.81 points to post a reading of 110.92 as the demand for workers decreased.”

It added that higher rates were to blame for slowing business output growth, after the output index decline by 1.94 points to 97.04.

The report said output in the services sector had slipped slightly, while manufacturing had marginally returned to growth, for only the second time since October 2021.

Businesses were more optimistic about the year ahead after forecasts showed inflation would continue to fall towards the Bank’s 2% target, with many indicating that they planned to hang on to staff in the event of an upturn.

Last week, Bailey said: “I think [the fall in inflation] will be quite marked by the end of this year.

“The question now is, as headline inflation comes down and people become more confident, that will we see inflation expectations continue to come down, too, and be reflected in wage bargaining?”

He said inflation expectations among consumers and businesses had moderated in recent months and firms had reported offering lower wage rises, with salary increases falling to 5% on average from above 6% only a few months ago.

The European Central Bank, which meets on Thursday, is expected to raise interest rates despite a string of business surveys showing the eurozone stands on the brink of recession.

Germany’s economy is forecast to shrink this year and most other nations in the euro currency club are likely to grow only modestly.

Kaley Crossthwaite, a partner at BDO, said: “Businesses are reacting to the higher interest rate environment with conservative decisions about hiring.

“And yet some optimism prevails,” she said, with confidence holding steady as businesses head into the “all-important golden quarter” in the run-up to Christmas.

“However, caution is the watchword,” she added. “Predictions for a recession paint a weaker picture for the economy, and we can expect a slump in output, optimism and employment in the final months of 2023 as a result of rising unemployment and higher rates for businesses.”

UK interest rate futures showed a 69% chance last Friday of a quarter-point rate rise to 5.5% by the Bank, down from more than 80% early in the week.

The chances of a further rate rise to 5.75% stood at 46%, with investors expecting cuts in rates to begin in about a year’s time.

Source : The Guardian

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