Three prime ministers and five chancellors since the last general election in 2019 and it is arguable that the country has not bettered itself in nearly four years. Granted we survived Covid which damaged countless economies around the world. Then there was Brexit which, as Richard Hughes, the head of the government’s independent Office of Budget Responsibility, noted at the end of March, caused a 4% drop in GDP compared to where the UK would have been if it were still in the European Union.
Of course, it was inevitable that in doling out billions of Covid cash that taxation would have to rise to repay the debt that the state took on. Indeed, from the government’s point of view, and that of business and citizens too, low interest rates are ideal since debt – public and private – would cost less to service. Equally though, high inflation eats away at the value of government debt so what the government really wants we can only guess at.
However, with rising inflation, that was meant to be ‘transitory’ but which became more engrained, interest rates were going to rise.
But what no one counted on was the clusterf**k that was the imperfect interaction of short-term prime minister Liz Truss – who left office faster than a well stored onion spoils, and her chancellor, Kwasi Kwarteng. Their attempts to restart the economy may have been well intentioned but were ill-thought out and uncosted. And the market spoke leading to interest rates that were forced up faster than expected causing untold misery and financial pain, and the Bank of England being forced into more bond buying to maintain a price floor.
It’s fair to say that Truss and Kwarteng’s actions didn’t accelerate the rise in interest rates and taxation, but rather, poured accelerant on. (It should be said that the Bank actually made £3.5bn profit on buying the bonds low and then selling them in a stronger market).
There were warnings late last year of serious recession. In fact, the British Chambers of Commerce was one organisation that warned in December 2022 that recession could last for five quarters and into 2024.
Subsequent to a new government, Jeremy Hunt was brought in by Rishi Sunak to be a safe pair of hands. He did stabilise the ship by halting virtually all of the Truss government’s economic plans.
With Hunt’s autumn statement and March 2023 budget, taxation is now at its highest since the Second World War. Interest rates too are at a 14-year peak. But it shouldn’t be forgotten that since the start of the millennium, they’ve hovered around 5%. They only dipped below the current 4.25% in five quarters before the financial crash of 2008 when they fell to an all-time low of 0.10%.
No one likes high interest rates and there are many who are suffering rising mortgage payments on large piles of debt. Partly they had no choice, but to borrow large sums if they wanted to buy property in an overheated market. But equally, there are a number of households that overspent in many areas – holidays or on PCP-funded vehicles – who had forgotten the impact and risk of higher interest rates more akin to the norm.
All of this aside, it appears that the UK has dodged the bullet and won’t enter into recession. That’s good. But the economy isn’t bubbling away either. The most recent interest rate rise – to 4.5% in May – was a bit of a shock since most expected inflation to head below 10%. But rising fuel and food prices put paid to that.
As for the future, the expectation is that rates will fall. Capital Economics reckons that the base rate will be cut to 3% at the end of 2024 and to 2.5% by the end of 2025.
High interest rates mean that the cost of borrowing money to purchase a higher-value ticket item increases, making the overall cost of ownership more prohibitive. Many buyers will hold off purchasing or opt for a cheaper or second-hand alternative model.
Interest rates can also have an impact on the length of financing terms. Buyers may opt for shorter loan terms when interest rates are high to avoid paying more over time. This can result in higher monthly payments, which may deter some buyers. As interest rates continue to fluctuate, it will be important for the motorcycle industry to stay attuned to changes in buyer behaviours and adapt accordingly.