Finance Executives Grow Cautious About Borrowing as Interest Rates Rise

17 Oct, 2023

Finance Executives Grow Cautious About Borrowing as Interest Rates Rise

A recent Deloitte survey shows that finance executives at top UK firms are displaying the highest level of caution about borrowing since at least 2007. The survey highlights the impact of rising interest rates on businesses and the broader economy.

The survey, published by Deloitte, revealed that the gap between chief financial officers (CFOs) who consider bank borrowing attractive and those who find it unattractive has reached a net minus 37%, the widest margin since the survey's inception 16 years ago. Additionally, a significant proportion of respondents expressed a lack of enthusiasm for debt sales, while equity finance gained popularity.

Deloitte's Chief Economist, Ian Stewart, noted that "higher interest rates have flipped a decade-old consensus which was previously in favor of debt finance." Finance leaders are bracing for a period of elevated interest rates, with predicted rate reductions being only marginal over the next year.

Although concerns about high inflation persist, the quarterly survey also indicated that business confidence remains above-average levels and has increased compared to three months ago.

The Bank of England (BoE) raised interest rates 14 consecutive times between December 2021 and August of the current year, temporarily pausing rate hikes in September. Key BoE officials have emphasized their intent to maintain high borrowing costs for an extended period, showing reluctance to swiftly lower rates, even as the UK economy grapples with growth challenges.

According to the CFOs surveyed by Deloitte, the average expectation is for the BoE to reduce its bank rate to 4.75% in a year's time, down from the current rate of 5.25%. Other forecasts include expectations for inflation to be at 3.1% in two years, a significant decrease from the current level of nearly 7% but still exceeding the BoE's 2% target. Wage growth is also anticipated to slow to 4.3% over the next year from the current rate of 6.2% as labor shortages diminish.