Economic insight: interest rates

Jon Lindsay, managing director at credit management firm Coface, considers the likely impact of recent interest rate rises

Two things happen when there is a rise in interest rates. Mortgage payments go up and, as a result, consumers have less money to spend; and at some point, banks have to review their lending practices.

We’re starting to see, beginning in the US, banks becoming tighter on credit. For the past decade, we’ve lived in a world where capital and credit have been readily available; that may come to an end.

The UK retail sector is under particular pressure. People’s spending power is reducing and when that happens there comes a point when it doesn’t matter how cheap a TV or DVD player is, people are not going to buy it because they just don’t have the money.

Who knows how hard or soft a landing it will be? All I can say is that businesses ought to be prepared and manage the risk. We’re in a situation where late payments are increasing and all the indications are that there will be more insolvencies.

I don’t think businesses are borrowing too much money, but how they borrow the money is the issue. There are enough options available to trade safely. If people are experiencing late payments, they can put their credit terms on a more formal footing. The key thing is to take a proactive approach to the problem rather than pretend it’s going to go away.