UK dealmakers expect inflation to sink to 2% before 2026
UK dealmakers are clashing with the Bank of England over its monetary policy – with 32% calling on the institution to lower interest rates, as they expect inflation will sink to 2% in the next two years. Either way, however, they believe there will be an increase in deal activity in the next year.
A new study from CIL Management Consultants suggests that dealmakers are deeply unhappy with the Bank of England. Threadneedle Street has been ramping up interest rates in the last 18 months – in a move it says will help bring the UK’s inflation crisis to heal.
However, with the price of borrowing having risen to 5.25% – having recently hit a historic low of 0.1% in early 2020, to help the economy during the pandemic – many dealmakers feel that the dramatic decline in the country’s M&A market has been exacerbated by the BoE. In this context, just 20% of dealmakers told CIL they think the BoE is doing a good job – having hit a high of 60% as recently as 2019.
With a 95% majority of UK dealmakers expect inflation to hit the 2% target set by the BoE, they also feel now is the time for change. According to CIL, an optimistic minority of 10% predict that this will happen in the next year and a realistic majority of 55% believe it will occur within the next two years.
Because of this, there has been a sea-change among the 143 UK market stakeholders CIL polled relating to monetary policy. In 2022, as historic levels of inflation saw prices sky-rocket, 54% of dealmakers called on the BoE to tighten monetary policy – and raise rates.
In 2023, however, as dealmakers anticipate falling inflation, they have changed their tune. While 61% do not feel any change is necessary, only 7% want further hikes in interest, while 32% advocate for its fall – as deal rates continue to lag. Of the 29% of respondents who felt the BoE is not doing a good job, some provided additional commentary cited the BoE’s slow response in raising interest rates as a reason for their dissatisfaction. Meanwhile, 49% of the group now worried about over-correction, and called for a reversal.
Even if monetary policy does not shift, however, dealmakers still remain upbeat about deal activity in the coming year. Not that this is a very high bar to clear. An 84% majority said the level of M&A activity was low in 2023 – including 13% who said it was very low. This is another world from the boom of 2021, when 87% felts it was high – including 37% who said it was very high.
Dealmakers clearly have an eye for predicting trends in the market. A 58% majority said they expected that decrease back in 2022. That 78% now expect at least a moderate increase suggest that the only way is up now. However, with only 6% expecting a significant increase, this may also be indicative of caution related to further rate hikes.
Commenting on the findings of the Investment 360 Index, Alex Marshall, a senior partner at CIL, said, “Although the Bank of England were slow to act, the business community feel the medicine is working. The Index shows that there is strong support for the current monetary policy being implemented by the Bank of England but a much wider range of views when it comes to the time it will take to bring inflation down to the 2% target. If inflation takes three to five years to come down to the BoE’s 2% target, businesses and consumers – not to mention the Government – will need to adjust to higher borrowing costs, which will have material implications for leverage, asset (including house) prices, and consumer spending.”