The key chart
Trends in average cost of borrowing for SMEs, PNFCs and HHs since December 2021 (Source: BoE; CMMP)
The key message
Who are the real losers in the BoE’s policy tightening race – UK SMEs or the wider UK economy?
The transmission of monetary policy to the cost of borrowing for SMEs has been rapid (+514bp) and faster than for average corporate borrowers (+494bp) and for households (+324bp). Monthly financing flows to the sector have also been negative since March 2021.
On the face of it, not good news for UK SMEs…
Looking behind the headlines, however, gross lending flows to the sector have been relatively stable so far this year (£4.9bn average YTD). They are slowing however on a cumulative 12-month and 3-month basis and, more importantly, they remain below the flows of monthly repayments.
In short, in the face of subdued demand and higher financing costs, SMEs are adopting prudent financing strategies. They are “utilising existing facilities and diverting some deposits to secure higher returns” (UK Finance, September 2023). Hence the subdued demand for new credit.
Why does this matter?
The key message from the money sector is that UK SMEs’ plans for future investment appear to be “on hold”. Given that they account for c.50% of private sector turnover in the UK and c.60% of employment, this suggest that the real loser here is the wider UK economy…
Who are the real losers in the BoE’s policy tightening race?
The transmission of monetary policy to the cost of borrowing for SMEs has been rapid and faster than for larger corporates and for households.
Trend in average cost of new SME borrowing (%) (Source: BoE; CMMP)
The average cost of new loans for SMEs has increased 514p from 2.51% when policy rate rises began in December 2021 to 7.65% in August 2023 (see chart above).
As shown in the key chart above, this increase is greater than the respective increases for average corporate borrowing (494bp), secured household borrowing (324bp) and other household borrowing (280bp).
Monthly net lending flows (£bn) (Source: BoE; CMMP)
Monthly financing flows to the SME sector have been negative since March 2021 (see chart above). Note that these trends reflect a balance between gross lending flows and repayments.
Monthly and 12m cumulative monthly gross lending flows (£bn) (Source: BoE; CMMP)
Looking behind the headlines, we discover that gross lending flows to UK SMEs have been relatively stable so far this year – £4.9bn average YTD (see chart above).
On a cumulative 12-month and 3-month basis they are slowing however, and they remain below monthly repayments (see chart below).
Monthly gross lending, repayments and net lending flows (£bn) (Source: BoE; CMMP)
In short, in the face of subdued demand and higher financing costs, SMEs are adopting prudent financing strategies. According to UK Finance analysis they are “utilising existing facilities and diverting some deposits to secure higher returns.”
Conclusion
The key message from the money sector is that UK SMEs’ plans for future investment appear to be “on hold”. Given that they account for c.50% of private sector turnover in the UK and c.60% of employment, this suggest that the real loser here is the wider UK economy…
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.