Bank of England raises base rate to 4.25% – business reaction

The Bank of England has raised interest rates for an 11th consecutive time to 4.25% following the surprise rise in inflation. 

The Monetary Policy Committee (MPC) voted for this change by a majority of 7-2, with the minority vote wishing to keep the rate at 4%.

Commenting on the announcement Federation of Small Businesses (FSB) National Chair Martin McTague said “Small businesses are counting on today’s rise in the base rate to be the peak, as the Bank of England predicts a steeper than anticipated fall in inflation, even following the unexpected rise we saw earlier this week.”

“Inflation is exacting huge tolls on small firms, who are even more exposed to spiralling input costs than large businesses, as they lack big corporates’ buying power and the ability to hedge prices. Continuing high inflation is undermining business confidence, and is an especially hard pill to swallow when small firms had been anticipating that it was beginning to be reined in.”

“This latest increase in the base rate means more worries for small firms carrying debts with floating rates, and will make it that bit harder for ambitious businesses to get the funds they need to grow, to pay for a new bit of kit, an extra shop, or a training programme.”

“We were disappointed that the recent Budget did not contain sufficient measures to set small firms back on a path to growth. The fuel duty freeze was good news, and extra support for childcare and measures to reduce economic activity were welcome, although the schemes announced will take some time to have an effect, and are not as comprehensive as we would have liked. However, there was little for small businesses to cheer elsewhere, with investment incentives aimed squarely at large corporates, and only scraps for small, innovative firms.”

“The end of the Energy Bill Relief Scheme, to be replaced in April by the far less supportive Energy Bills Discount Scheme, is another point of high danger for thousands of small firms. Business customers who signed up to new contracts last year when wholesale prices were sky-high must be allowed by energy companies to take advantage of the fall since then in wholesale costs by blending today’s rates with their original contract rates under an extended contract, to reduce the risk of shrinkage or even closure.

“The Government needs to demonstrate that it is on the side of small businesses who are feeling stressed and under huge margin pressure. We can’t afford to lose huge swathes of small firms, who could under the right circumstances be the engine of growth we need to get us out of our current economic doldrums.”

David Bharier, Head of Research at the British Chambers of Commerce, said “Today’s decision to increase the interest rate indicates the Bank are still pursuing strong action following yesterday’s surprise rise in inflation. Record high inflation remains the top issue of concern for SMEs, and it has been wiping out their ability to invest and grow for almost two years now.”

“However, an interest rate rise alone is a blunt instrument that doesn’t address some of the fundamental causes of inflation such as failure in the energy market and global supply chain shocks.”

“The cost-of-living crisis and the cost of doing business crisis are two sides of the same coin and SMEs, like consumers, are getting hit from both rising prices and rising borrowing costs. The only way out of this vicious cycle is through taking action to boost economic growth, through investment in infrastructure, skills, and global trade.”

Anna Leach, Deputy Chief Economist at the CBI, said “The interest rate decision was a tricky one for the MPC, taking place against the backdrop of recent global financial market turbulence, a surprise rise in domestic inflation and a Budget which provided more support for the economy.”

“The choice to raise rates to 4.25% comes against a backdrop of stronger-than-expected activity so far this year, and strong domestic inflation. The MPC will also have an eye to the recent turmoil in the banking sector. While financial stability is the remit of the FPC, an excessive tightening in credit conditions for businesses and households arising from financial market turbulence could cause the MPC to reconsider the level of interest rates in future months.”

Suren Thiru, Economics Director at ICAEW said “The decision to raise interest rates looks a little ill-advised against a backdrop of economic uncertainty and financial market volatility. The Bank of England remains behind the curve on interest rates. It was too late to tighten monetary policy when inflation surged, and now it’s still hiking rates despite a flatlining economy and financial market turbulence.”

“While we’re already seeing the negative impact of rapidly raising rates on financial stability, the lagged impact on the real economy means that damage to households and businesses is yet to be fully felt.”

“With a flagging economy and lower energy costs still set to drive a significant fall in inflation this year, despite February’s surprise increase, the case for cutting interest rates is only likely to grow.”