Base rates remain the same! So what does this mean for the SME sector?

Base rates remain unchanged at 0.5% for the 27th month in a row and nobody is surprised one iota.

A plethora of renowned economists were today absolving themselves of failed past forecasts of rate increases to be replaced with fresh future forecasts. Rates will start to rise again at some point in the not too distant future - a fair summation of the rhetoric….genius!

The latest consensus is that rates will remain suppressed until the end of 2011 on the back of weakening GDP figures plus March’s fall in inflation. This week’s inflation report will give an even clearer picture of the situation – as will the publication next week of the Monetary Policy Committee’s minutes when we learn who said what and why and how the votes were split.

The net effect is that the 2 year fixed rates for savers are looking increasingly good value, with our own Skipton International launching a two year fixed rate of 3.4% on a minimum investment of £10,000 that looks like excellent value given yesterday’s announcement.

So what does this mean for the SME sector in the UK? Those businesses that employ less than 100 staff will ultimately decide the future destination of the UK economic landscape. A rate rise will immediately be passed onto businesses in the form of higher borrowing fees that are all linked to the BoE base rate and this will need careful management if profits are not to suffer.

In my experience, SME’s are universally poor at increasing prices especially when other suppliers are readily available to its customers. The key therefore is in mitigating higher potential borrowing costs with better prices on raw materials. Negotiating rates down will be a key ingredient for those able to offer accelerated payment terms in exchange for better prices.

Cash is king and those that can afford to negotiate hard and offer accelerated payment will see the benefit in bottom line profits that in turn will create future liquidity.

I look forward to reading the MPC minutes when published but my money is on a vote of 7 to 2 in favour of an early lunch and no change and this is set to continue for a time yet.