Bank of England hikes interest to 4.5% – business industry reaction

12th May 2023

The Bank of England has raised its key interest rate by a quarter of a percentage point to 4.5%, marking its 12th consecutive rate rise. The BoE revised up its growth forecasts from gloomy numbers released in February, but it also now expects inflation to be slower to fall than it had hoped, mostly due to unexpectedly big and persistent rises in food prices. The BoE predicts inflation will not return to its 2% target until early 2025.

Following the decision by the Bank of England to increase the base rate from 4.25% to 4.5%, Federation of Small Businesses (FSB) National Chair Martin McTague said “Small firms will be especially worried to see the base rate rise once more, following unexpectedly persistent levels of inflation, and will once again be hoping that today’s rise represents an apex.”

“Further rate increases past this latest one will risk entrenching the economic damage to small firms, severely curtailing their ability to invest and grow. We cannot end up in a situation where the cure is adding to the harms caused by the disease.”

“Getting the rate of price rises under control is vitally important for small firms, but they could be forgiven for asking if the blunt weapon of base rate increases is effective, given that they are still very much feeling the effects of higher prices at the same time.”

“Recent remarks on inflation by senior members of the Bank of England team have reinforced small businesses’ fears that the Bank is out of touch with the reality of running a small firm in the UK. With rate rises dampening consumer demand and making many business debts more expensive, small firms are absolutely up against it, while Government energy support has fallen away, leaving many exposed to spiralling utility bills.”

“The UK’s economic ecosystem needs small businesses to invest in order to grow and thrive, which means they need access to affordable credit. Our Small Business Index research found that small firms’ view of the affordability and availability of credit hit its lowest ever level in the first quarter, while the interest rates on loans have surged. While overall, small firms’ confidence bounced back compared to the end of last year, it’s still not in positive territory, and a record proportion of small businesses said their costs were higher than in the same quarter last year.”

“Policies to help small businesses to invest and prosper seem thin on the ground. To address this, the Prudential Regulation Authority must cancel its plans to remove the SME supporting factor, which makes lending to small businesses less capital-intensive for banks; its loss would only make the lending situation more difficult for small businesses. The Government tackling late payment to free up cash for small firms in supply chains would also be a huge help – the value of wrongfully withheld payments is eroded for every day that funds are not released to supply chains.”

Tommaso Aquilante, Associate Director of Economic Research at Dun & Bradstreet said“While the UK economy has proven more resilient than expected, inflation is far from tamed. And with both wage and core inflation now at around 6%, the Bank of England is legitimately worried about a wage price spiral. By ensuring price stability, the Bank of England plays a crucial role in the economic system, allowing households and businesses to plan their spending and investments more predictably. Bringing inflation down is the priority.”

“Yet, even if inflation eased and did not increase further, this year will likely remain tough and data shows that a quarter of business leaders cite weakening consumer demand as the most significant threat. Having a defence strategy here is critical and businesses need to have the knowledge and tools in their armoury to make well informed decisions to remain resilient but also competitive so that they can find innovative ways to serve customers when demand is lower and costs are higher.” 

Anna Leach, CBI Deputy Chief Economist, said “The MPC has again been driven to raise rates by stubbornly high inflation, ongoing strength in wage growth, and better-than-expected activity. With inflation having been at or above 9% for a full year, the Bank are rightly concerned that higher inflation could become entrenched.”

“The future path for interest rates is as yet uncertain. With ongoing bouts of banking sector turbulence in the US, risks to financial stability seem likely to persist as global interest rates continue to ratchet up and the full impact of past rises continues to feed through. While credit costs have so far adjusted smoothly, further material turbulence could yet disrupt activity, requiring a looser monetary stance. On the other hand, inflation could surprise to the upside, particularly if wage rises remain elevated, suggesting further rate rises”.