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One of the main concerns is that business costs are already on the uptrend as a result of rising raw-material and transport costs. The fear is that the business sector may not be able to cope with extra interest expenses.

It is undeniable that business costs will increase in tandem with the upward interest-rate cycle. Both bond yields and commercial banks' lending rates have already risen. However, to assess the impact of an interest-rate increase, one should look primarily at the structure of business financing.

Businesses today have reduced their exposure to interest-rate changes with a more balanced debt-to-equity ratio. They have learnt since 1997 that over-leveraging will eventually lead to an unhealthy financial position. Their financial structure, as reflected in the balance sheets of listed companies, has already changed dramatically. A decade ago, businesses tended to have debts of four to five times their equity. Today, the debt-to-equity ratio is approximately one, a result in part of the shift from external to internal financing.

Financial costs as a proportion of total production costs are also quite low nowadays, particularly for large firms. On average, interest costs are below 5 per cent of overall costs, reflecting low sensitivity to interest-rate changes. Admittedly, SMEs may be more affected by a rise in interest rates, although not as severely as generally feared. This has been evidenced by a marginal rise in NPLs during the last interest-rate up-cycle.

In addition to a stronger financial structure, a resilience to shocks has resulted from businesses adjusting to enhance profitability by increasing productivity, for example by employing more efficient machines or using higher technology, and reducing costs by such strategies as the introduction of a logistics system. All these efforts should result in higher profit margins for businesses. Concurrently, nevertheless, fierce competition, domestically and globally, remains

key in capping profit potential. The survival of the manufacturing sector, therefore, needs substantial improvement in productivity and value-added components.

During the interest-rate up-cycle, though businesses will face higher costs in the short term, they will benefit in the long run. Should inflation persist at a high level and people perceive that it will remain so, business costs in the future will increase and remain high, and so will wages and financial costs. This could even lead to a wage-price spiral. On the other hand, if inflation is controlled and maintained at a low level, businesses will gain. Gains will be from the better prospect of higher consumer confidence and purchasing power, together with lower interest rates in future periods when inflation is no longer a threat to sustainable long-term economic growth.

In the final analysis, increasing interest rates today is all about foregoing some gain in the short run in order to ensure medium- and long-term benefits for the economy as a whole.