Expect rate rise to tackle ‘real’ inflation, says Vosa

INTEREST rates could rise in the fourth quarter to tackle ‘real’ inflation sparked by wage rises.

That’s the view of Tom Vosa, head of market economics at Yorkshire Bank, who discussed the state of the economy with private equity investors, professionals and business people at a lunch in Manchester last week.

Despite uncertianties, the mood of the panellists was one of cautious optimism, with investors hungry to do deals and the manufacturing sector seeing good growth. 

Discussing the question of inflation, Mr Vosa said the current rate of 4.5% was “artificial” and part of the Government’s “plan A” to inflate away debt by employing tools such as quantitative easing.

In contrast “real” inflation could kick in if wages rise and the price of goods and services don’t fall back.

“The UK has never defaulted but inflates its debt away,” said Mr Vosa. “The plan is to support asset prices and equity markets – they’re kicking the can down the road in the hope that homeowners have more equity and are less likely to default and the banks have more capital and can stand rightdowns.”

Looking ahead Mr Vosa said UK growth would be “soggy” in the second quarter, bogged down by Easter and the Royal wedding.

The third quarter would be stronger and there could be a rate rise in the final three months. He predicted that growth could hit 2% next year.

The event was organised by Peter Smith, pictured, a director in Yorkshire Bank’s Corporate and Structured Finance team. It was attended by representatives from ISIS, YFM, Zeus Group, NM Rothschild, Rickitt Mitchell, and accountant Cowgill Holloway. Law firms Pannone, Eversheds and Hill Dickinson were also present along with executives from Stockport-based Advanced Childcare and Runcorn’s Banner Chemicals.

The issue of lending to small and medium-sized enterprises (SMEs) was a prominent feature of the discussion. Guy Bagshaw of Rothschild said he was aware of companies that were able to meet interest payments but were turned down for loans “because they were too small”.

In the banks’ defence Mr Smith said: “We’re very much open for business and alive to opportunities but confidence is still an issue. Companies don’t have the appetite to take on deals when confidence is still quite low.”

His colleague, director Guy Taylor, added: “As a bank our approach hasn’t changed but in 2010 we just weren’t getting deals through the door.”

Ian Gillis, partner at the law firm Hill Dickinson, pointed out that a dependence on public sector contracts had undermined some firms’ ability to secure further lending. He added: “Access to finance is increasingly difficult for SMEs and it’s not just the banks. What are the private equity houses doing?”

Joe Bergin, head of North West investment at private equity house YFM, said the industry was under pressure “to get money out of the door”. “SMEs would probably benefit from having a bit more equity finance anyway. The attraction is to do everything on debt because it’s cheaper.”

His private equity colleague James Titmuss, investment director at ISIS Equity Partners, said the firm was being held back by a “paucity of opportunity”. For Titmuss one of the legacies of the credit crunch has been more banking checks. “Something that used to take a day now takes a week.”

Shelagh Rogan, pictured, finance director at Advanced Childcare, said there is generally more due diligence, citing the example of the business’s £28m sale to GI Partners in March. “There were five sets of lawyers.”

She added: “It’s a tough market but for us there are opportunities. We’re having to be more innovative and do more for less. We can offer a different solution. You have to be very careful with the cost base. That’s the single most important factor.”

Colin Boyle, chief operating officer at Banner Chemicals, also offered an optimistic outlook: “Our products go into the manufacturing sector and since 2008 we’ve seen some improvements in UK manufacturing and have increased export orders as well. So, overall we’ve performed reasonably well.”
 
Alex Clarkson, a director at Zeus Capital, added: “Now is a great time to be investing in companies if you’ve got the cash. We’re all nervous, wondering what will happen but at least we’re getting to the end game.

“We all know there are companies that need to go into administration. Once they’ve gone it’ll clear the decks.”