Interest rates are set to rise in 2015′. Assess how this will affect APSL’s strategic direction. (23)

**This question was kindly posted on my ‘About’ page comments, anonymously

Interest rates are set to rise in 2015′. Assess how this will affect APSL’s strategic direction. (23)

Interest rates are the cost of borrowing and the reward for saving. If interest rates increase the cost of borrowing increases. A rise in interest rates will therefore make it more difficult to reduce gearing if they have variable interest rates because total interest payments will rise. Therefore Net profit will fall which will also make it more difficult to increase the returns for the shareholders. If interest rates are fixed then they will not be affected in the short-term but it is likely that they will only be fixed for a 2-5 year period.

A rise in interest rates will also mean that consumer spending is likely to fall as mortgage costs will rise meaning that discretionary income will fall for many households. Furthermore, it makes savings more attractive and makes it more expensive to borrow/use credit cards for big ticket items. APSL supplies to firms making Caravans, lawnmowers, shower trays etc which are all big ticket items so are likely to be bought using credit for many consumers. Therefore the demand for these products may fall, especially if incomes aren’t increasing at the same pace so APSL may face a fall in sales in the UK market. They may have to discount to maintain sales levels which would reduce profit margins.

A rise in interest rates is likely to appreciate the pound. This is because overseas investors will take advantage of higher interest rates in the UK and buy pounds to put into UK bank accounts. An appreciation of the pound makes exports dearer and imports cheaper. This will make it more difficult to achieve their objective of increasing exports. They may need to cut prices to offset the exchange rate appreciation. However, it is unlikely that the exchange rate will appreciate against all markets and it may not have an impact if other countries such as the EU put up interest rates as well. In the case of the EU and USA this is highly likely as these countries have had similar economic problems to the UK. Furthermore, products like flaxiboard are likely to be price inelastic as it is lighter and environmentally friendly so will be bought because of it’s features rather than price.

In conclusion, a rise in interest rates will make it more difficult for APSL to achieve its strategic objectives. However, they are unlikely to change their direction as they are aiming to export which spreads the risk of rising interest rates and they are have focused of product differentiation in terms of quality, making products less price elastic so less vulnerable to interest rate changes.

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