The UK economy breathed yet another sigh of relief this morning when it was revealed that the inflation rate has fallen to 2.3%, reducing costs across the country’s business sectors.
This follows the recent news that the economy had exited recession after growing 0.6%, the sharpest growth in two years. Meanwhile, the Bank of England also decided to hold interest rates at 5.25%, meaning consumer costs were held at bay.
The 2.3% inflation rate means costs for consumers are still rising and higher than in previous years. However, consumers and businesses will not see costs rise as much as previously expected.
In addition, the 2.3% rate is within reach of the Bank of England’s ideal target rate of 2%. This will come as welcome news for Rishi Sunak’s Conservative government, which has been facing dismal approval ratings in an almost certain election year.
Michael McGowan, Managing Director of Bibby Financial Services’ Foreign Exchange, said: “Today’s announcement that UK inflation has fallen to 2.3% is welcome news for UK businesses, as optimism steadily builds at the prospect of a sounder economic environment.
“Small and medium sized enterprises (SMEs) have particularly struggled over the past two years, with our polling of 1000 SMEs recently revealing inflation to be the number one challenge they face.
“High business costs have been keenly felt, and no small degree of resilience has been required of small businesses to weather the storm, to now.”
The sudden reduction in inflation is as positive for the payments and fintech sectors as it is for every other segment of the British economy. Firstly, payments firms could expect transactions, and therefore payment volumes, to increase as consumers will find their wallets being significantly less stretched.
Meanwhile, as Bibby’s McGowan noted, business costs will also decrease. For the plethora of SMEs that operate in the UK’s extensive fintech and payments sectors, this will be a huge boost.
Additionally, the myriad of positive economic news the UK has had lately could be indicative that the government’s financial strategy is working. Fintech has been central to this, so the news may also demonstrate the significance of the sector to Britain’s economy.
The government has been pursuing a range of goals in fintech. This has included supporting the development of artificial intelligence, promoting British Open Banking, and aspiring for the country to become a hub for crypto and digital assets.
Companies active in payments and fintech should pay close attention to any political and economic developments following this news. As noted above, the Bank of England’s decision to hold interest rates is closely connected to inflation, and is an important factor for many businesses.
“Looking forward, the Bank of England’s 2% target is in touching distance,” McGowan continued. “That could mean cuts to interest rates, with the IMF suggesting up to three cuts possible this year – leading to better conditions for SMEs to borrow, invest and grow.
“Yet, at the same time, shifting circumstances in the domestic economy can mean uncertainty for those trading abroad. SMEs should absolutely feel buoyed by the UK’s improving economic outlook, but those with international interests should also shore up their FX strategies to best capitalise on the opportunities to come.”
