Interest rate rise to 3.5% – business industry reaction

The Bank of England’s Monetary Policy Committee has voted to increase interest rates to 3.5 percent, a rise of 0.5 percentage points.

The latest rate increase marks the ninth hike this year and the highest level since the financial crisis 14 years ago.

Commenting on the rise, Kitty Ussher, Chief Economist of the Institute of Directors, said “From a business point of view, if higher interest rates are required now to stabilise prices in future, then the resulting ‘necessary recession’ should be as short and shallow as possible.”

“With the labour market starting to turn, the economy already contracting and base effects from last year’s price rises expected to bring next year’s headline inflation rate down automatically, it is important that the Bank does not tighten too far and risk prolonging the pain. Not only would that be bad news for households and businesses, but it would also risk the Bank undershooting its own inflation target in the future.”

“On balance, while today’s rise may be justified, given the long lead time between interest rate rises and the impact on demand, we may soon be getting to the point where enough has been done.”

Alpesh Paleja, Lead Economis from Confederation of British Industry (CBI) said “Another big interest rate rise from the Bank of England doesn’t come as a surprise, in the face of historically high inflation. However, with global price pressures starting to wane, along with the economy set to fall into recession, it is likely that we’ll see smaller interest rate rises for the foreseeable future.”

“Nonetheless, high inflation and weakening activity will continue into 2023, putting strain on many households and businesses. With monetary policy focused on tackling inflation, the government must use economic levers to stem the severity of an oncoming downturn, but also to address the UK’s persistent weakness in investment and productivity. We cannot afford to have another decade where both are stagnant.”

David Bharier, Head of Research at the British Chambers of Commerce (BCC), said “Today’s interest rate rise to 3.5%, while expected, adds further pressure to firms facing soaring costs from all directions.”

“With some evidence of inflation now beginning to ease, it will be vital that further interest rate action does not exacerbate the recession the UK is entering.”

“Today’s increase to the interest rate will come as bad news for both mortgage holders and firms that have higher borrowing costs, particularly those who need to buy in bulk to mitigate against supply chain shocks.”

“The Bank of England now face a conundrum of when to ease monetary policy, given that the main drivers of inflation have shifted from external factors, such as shipping and raw material costs, to domestic factors, such as energy and labour costs.”

“Only business investment and growth will solve the stagflation problem. Firms need to see concrete actions on the measures that produce the right environment to invest, such as infrastructure, skills, and trade.”