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Dealers feel the bite of higher interest rates

Rises in the cost of borrowing are starting to affect motor retailers’ profits, and the Bank of England base rate is now 5.25%. An increase to 5.5% is widely expected to be announced by the Bank in May.

Keith Parry, head of the motor retail group at Barclays Business Banking, says: “There is a lot of speculation about an increase in May and the money market has factored it in.

“For dealers, the higher cost of borrowing to buy stock is a real concern and some are saying they have had a tough start to the year. By May, we could have seen a one percentage point increase in base rate within a short period.

“Well-run dealers groups – and there are an increasing number of them – will find a way through this, but these rises in a low-margin sector are having an effect on the bottom line.”

Much rides on this month’s sales of new cars, with the introduction of the new ’07 plate. Parry says: “It is not just how well dealers did on March 1 – it’s performance throughout the month that counts.”

Rises in interest rates, fuel prices for vehicles, domestic energy bills and tax bills all depress demand.

“Manufacturers are watching the performance of the market closely this month and many are already offering zero or low finance deals.”

There are, however, reasons for optimism. There is a likelihood that an interest rate in May will see a peak for the time being, and probably falls later.

The Bank’s committee adjusts base rate to keep inflation within boundaries set by the Chancellor of the Exchequer. Mervyn King, governor of the Bank of England, has indicated he does not expect a base rate rise above 5.5%.

Inflation hit 2.7% in January. A Bank of England report says it could take two years for it to drop back to its target of 2%, and King warns there is still uncertainty about prices.

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