Bank of England halves interest rates, but what does this mean to UK businesses & the energy market?

With the MPC having just confirmed what we all had anticipated – today’s halving of the Bank of England interest rate from 0.5% to 0.25% - we take an initial look at what this means to the energy market and the impact it could have on UK businesses.  Should you fix and secure an energy price today?  Opt to trade the market with a flexible contract?  Or sit and hold out until circumstances settle?  We weigh up the drivers and options open to your business today.

1.     The Pound hit a 31-year low against the dollar and is currently trading at 1.19 against the Euro - with the UK importing approx. 50% of its gas supply, any decrease in the value of the Pound could increase wholesale energy prices if not immediately, in the very near term which suggests a ‘fixed’ strategy looks inviting. 

There are significant risks affecting the UK energy system, primarily the exchange rate between Sterling and the Euro, as well as how the UK will cope without the main gas storage facility online.
— Guillermo Baena Gomez, Senior Market Analyst, Advantage Utilities

2.     With interest rates now at 0.25%, overseas investors could foresee a lower return on UK assets relative to their foreign-currency equivalents, tending to make sterling assets less attractive – with investment in nuclear and sustainable energy sources planned from foreign multi-nationals, this drop could mean investors look more closely at whether continuing is in their benefit and thus placing security of supply as an additional driver, again suggesting that exploring a longer term fixed strategy could protect UK businesses in the short to medium term.

3.     Looking at published economic data, many reports are suggesting that the economy is slowing hence remedial action by the BoE - the FTSE 100 spent its fourth successive trading session in the red, dropping 11 points to 6,634.40. In addition, according to Markit, the Business Activity Index fell from 52.3 to 47.4 over the last month, the largest decline in the index since it began twenty years ago – both suggest this hesitancy to ‘spend’ and invest places the UK in a ‘risk adverse’ position.  UK businesses could temper this by exploring a flexible energy strategy that tracks the wholesale market on a frequent basis.

The decision to cut interest rates and increase quantitative easing sends a clear signal that the Bank of England is taking a ‘whatever it takes’ approach to stabilising the economy. Weak post-Brexit data is creating a perception that the economy is likely to slow and the decision to reduce rates has been made on the basis of a perception of risk
— Dr Rebecca Harding, BBA Chief Economist

 

4.     Cash-flow across UK businesses could also be affected by the reduction – the fall reducing income from investments, savings and interest payments due - so the ability to budget more accurately against both non-commodity costs and energy costs could enable UK businesses to better position themselves during these uncertain months.

As a package, the measures announced will provide greater certainty for businesses so they can plan for the future
— Dr Rebecca Harding, BBA Chief Economist

Questions? You can speak to one of our expert team on what this could mean for your business today by calling 0207 371 5360.