How might negative interest rates impact small business investment?
A policy maker at the Bank of England has defended the potential use of negative interest rates, calling results from other countries ‘encouraging’. The move could effectively mean that savers pay to have their money with banks and are incentivised to borrow money and increase their spending.
Last week saw the Bank clear the way for the use of the controversial economic measure with Governor Andrew Bailey making it clear that it was a real possibility, despite previously indicating that he would prefer not to use it.
Many government bonds and investments are already offering investors what are effectively negative returns on their capital once inflation and other factors have been taken into account. This has driven record numbers of investors into alternative assets such as Gold which does not offer income at all and into equities that have struggled since the beginning of the year.
The Bank of England is doing all it can to encourage investors and savers to part with their cash at the moment when many are looking to hold on to as much as possible. Whether or not charges to save will be passed on to consumers remains to be seen, but it will, however, mean that incentives to save will be lower than ever.
As ‘safe’ assets become less and less attractive to investors with ever diminishing, and even negative, returns, we could now see a big move towards investment in businesses and more illiquid assets that also contribute to the growth of the economy. SMEs are perfectly placed to fill this gap, as opportunity for growth abounds – especially after times of economic turmoil.
There are a huge number of SMEs that have adapted quickly to the pandemic and the changes it has ushered in. Many are now primed to grow, create jobs and increase value for investors. There is huge volatility in markets at the moment, which is putting some investors off – but thinking long-term can offer a refreshing change of perspective.
Schemes such as the Enterprise Investment Scheme will be more important than ever by offering investors a tax-efficient way to back small growth businesses; reducing risk and increasing the potential for returns on investment. Investment in this sector will also be key to encouraging economic growth, with the SME arena historically employing around half of the private sector workforce and accounting for 99% of all businesses.
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