Following an unexpectedly sharp drop in the UK’s rate of inflation towards the end of last year, there are expectations that the Bank of England could be poised to cut interest rates, potentially signalling an easing of the tough financing conditions that restricted M&A activity during 2023.
UK dealmaking fell to its lowest levels since 2009 last year, amid widespread economic uncertainty and tightening financing conditions that made it difficult for businesses with the appetite for acquisitions to access the required capital. This continued a drop in M&A that has been ongoing since 2022, following a post-COVID boom in 2021.
However, with inflation falling, there are hopes that interest rate cuts could help to reverse this and drive improved activity during 2024, particularly among smaller and mid-sized companies that view M&A as a core part of their growth strategies and UK buyers hoping to target mid-sized assets.
According to new forecasts from Investec, Deutsche Bank and Oxford Economists, slumping global energy prices and wholesale oil costs should help the rate of inflation to drop below 2 per cent during the first four months of the year.
In light of this, as well as the pressures consumers and businesses continue to face amid high interest rates and with growing recessionary fears across many economies, the Bank of England is coming under pressure to cut rates in order to help kickstart the UK economy.
Trachet CEO and Founder Claire Trachet said: “Many voices from across the investor landscape are calling on the BoE to urgently reassess their macroeconomic priorities in the new year. With inflation set to continue its rapid fall and symptoms of a potential recession worsening, it’s time that policymakers looked towards kickstarting the UK’s economic recovery.”
Trachet stated that a drop in interest rates would enable scale-ups and high-growth potential SMEs to help drive a recovery in UK dealmaking, by providing greater access to M&A funding and unleashing pent-up appetite for mid-sized deals.
She continued: “Within the M&A sector, the mid-sized merger is poised to dominate the dealmaking landscape, with many overseas investors looking to buy-up undervalued UK-based startups. A cut to interest rates by the BoE would, therefore, be essential in allowing domestic investors to take a greater share within the UK’s projected M&A recovery, reverting the focus back towards high-growth ventures.”
Find out why SMEs will be vital to a potential dealmaking recovery during 2024
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