Will the cost of finance rise in the UK?
There is much talk today of further problems in the European debt markets with liquidity in the money markets and interbank lending arena still very low. Slowly but surely we have seen a gradual increase in the cost of finance for governments around Europe which has also impacted on the cost of finance for businesses. So will we see the cost of finance in the UK rise in the latter part of 2010?
Despite the fact that UK base rates have remained at 0.5% for many months now, and are likely to remain there for some time to come, unfortunately UK base rates do not have the same impact on the money markets of today as they did prior to the credit crunch. The lending rate in the money markets is significantly higher than UK base rates at the moment and if, as expected, liquidity continues to decline and lenders decide to wait on the sidelines we will see the cost of finance in the UK gradually moving higher again.
The UK government has, in the past, pumped billions upon billions of pounds into the UK money markets as a means of oiling the wheels of business but there is nowhere near the same funding available today. If money market rates in the UK, and across Europe, continue to move higher then it will only be a matter of time before UK consumers and UK businesses are asked to share the pain.
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