Could negative interest rates push investors to back SMEs?

Funding | Reports

The Office for National Statistics (ONS) yesterday revealed that inflation in April nearly halved to 0.8% from 1.5% in March as the impact of lockdown and low oil prices took effect.

The Bank of England target of 2% means that further measures may be taken to increase inflation and encourage consumer spending. While this will most likely take the form of further quantitative easing, there has been talk of introducing negative interest rates.

The Bank of England has already bought up billions of pounds worth of Government bonds through quantitative easing, freeing up the Government to spend its way out of the Coronavirus crisis.

Government bonds are seen as ‘safe haven’ assets to hold in times of economic instability. Yesterday, however, saw the first time that the Government sold bonds at a negative yield – -0.003% – meaning that investors are effectively paying the Government to hold their money for the three year period of the bond. Coupled with record low interest rates on savings – and discussions around negative interest rates – this may encourage investors to less traditional assets in the hope of higher returns.

Luke Davis, CEO of IW Capital, discusses the implications for SME investment in the coming years: “While the Government has increased its need to issue bonds to fund massive spending, this is not a never-ending supply of capital and looks to be a short-term measure to help the economy get back on its feet. This comes down to helping businesses survive, grow and hire more employees.

“As ‘safe’ assets become less and less attractive to investors with ever diminishing, and even negative, returns, we could 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.

“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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