Interest rate rises to 4% – business industry reaction

The Bank of England (BoE) has upped the base rate by 50 basis points to 4%, marking the tenth consecutive increase.

This hike, the tenth time Threadneedle Street has done this in a row. The 0.5% increase is the second consecutive rise of that magnitude, but still less than the 0.75% rise recorded in early November, which was the biggest hike since 1989. The interest rate is now at a 14-year high.

Commenting on today’s Bank of England interest rate rise, Federation of Small Businesses (FSB) National Chair Martin McTague said “Small businesses are hoping against hope that today’s rise in the base rate will signal a turning point in the Bank of England’s battle to bring inflation under control. Small business cost increases have run considerably above the headline rate, and these must be brought down.”

“That said, the higher rates announced today come with consequences. The last time the rate was higher was 2008, when inflation was running at around half its current level. With the rising prices of inputs of all kinds, most notably energy, having greatly restricted small businesses’ financial headroom, to then have the cost of debt go up too is a double blow.”

“Consumer spending is stuck in the doldrums, with retail spending over the festive period anaemic at best. Increased mortgage and loan costs will further dampen people’s willingness and ability to open their purses, spelling further pain in the short term for consumer-facing industries, which will inevitably feed through to other sectors as the situation persists.”

“Our Small Business Index saw a steady rise in the interest rates for finance offered to small businesses over 2022, with a four-fold rise in the proportion of applicants offered a rate of 11% or more on a loan in the final quarter of last year, compared with Q1. Increased mortgage costs therefore come on top of costlier commercial loans, and repayments for debts taken on to get through the pandemic. The small business community that survived Covid is doing so steeped in debt, some of it now more expensive.”

“Now, over half of small firms rate the availability and affordability of new credit as poor, up from one in three at the start of 2022. This is especially worrying at a time when cash reserves are running dry for too many small businesses and self-employed people, with one in eight microbusinesses having no cash reserves at all, and over a third only having up to three months’ worth. Half of hospitality firms – a sector dominated by independent businesses – only have up to three months’ worth of cash to hand.”

“This structural financial vulnerability is feeding through to insolvency numbers, and we’re concerned that 2023 will see a flood of more business closures, both formal and informal. This will harm the economy as people lose jobs, high streets lose tenants, and businesses lose customers and suppliers, while bad debts spread.”

“The Budget in six weeks’ time must be grasped as an opportunity for the Government to promote a growth agenda. From tackling late payment, addressing skills and labour shortages, reversing cuts to R&D tax credits, and lifting more small firms out of paying business rates, we think there is much that could and should be done. Small businesses are the economic grassroots and – if left to wither – the whole economy will suffer.”

Kitty Ussher, Chief Economist of the Institute of Directors, said “Inflationary pressures are more persistent than the Bank of England had previously anticipated. Core inflation is not yet falling, and price rises are still accelerating for some sub-categories, including food.”

“Institute of Directors survey data from January shows that only a quarter of business leaders now believe inflation has peaked, with even more – around four in ten – thinking it will not peak until the summer at the earliest. This matters because expectations of inflation can become self-fulfilling.”

“Combined with the welcome news that the Bank accepts its previous warnings of recession were too pessimistic, we think they are right to raise rates again today. This will help establish business expectations of inflation on a firmer downward path, which will itself put downward pressure on prices.”

“However, given the long lead times between an interest rate rise and the full economic effect being felt, it is also becoming increasingly likely that interest rates may have to be lowered again once inflation is under control, to prevent the inflation target being undershot in the medium term.”

Tommaso Aquilante, Associate Director of Economic Research at Dun and Bradstreet said “The announcement highlights that the Bank of England has blamed an increase in interest rates to 4% on the inflationary impact of higher-than-expected wage increases, putting additional pressure on mortgage holders and businesses struggling to pay off their loans.”

Anna Leach, Deputy Chief Economist at the CBI, said “The Bank’s decision this month shows that it is still too soon to call an end to peak interest rates. While inflation is coming down thanks to lower energy prices, labour market shortages and broader inflationary pressures mean higher rates are still needed to bring inflation back to the 2pc target.”

“Rising interest rates, high inflation and tightening fiscal policy will challenge economic growth this year. The government needs to act decisively in the forthcoming Budget to reinforce the UK’s position as a global centre for innovation and the low carbon economy.”

David Bharier, Head of Research at the British Chambers of Commerce (BCC), said “The Bank’s decision to raise interest rates for a 10th consecutive time continues its hard-line approach to inflation, but this is not without serious side-effects. Those impacted most by today’s decision will be mortgage holders and businesses reliant on debt to keep afloat after three years of economic shocks.”

“Our research shows that while inflation remains by far and away the top concern for businesses with 80% citing this in Q4 2022, concern about interest rates has risen sharply with 43% now citing this. With the Bank expecting inflation to slow to around 4% by the end of the year, further rate rises could now simply add to the risk of a deeper recession, outweighing the benefits.”

“The main driver of inflation for most firms is energy costs, but this requires a clear policy solution, with immediate relief for those most affected and longer-term structural changes to ensure this market failure does not occur again.”

“Businesses will also need to see concrete action in the upcoming Budget to promote growth, including plans on infrastructure, tax, skills, and trade.”

CEO of Octane Capital, Jonathan Samuels, said “Another month, another escalation of the Bank of England’s current stance on raising borrowing costs. This is the tenth consecutive rise from our friends in Threadneedle Street and miles away from the now distant days of a sub 1% environment.”

“That said, one hopes that all of the blood has now been squeezed from the stone and that rates have peaked. Surely it’s time that we focus on investing in business growth now that inflation seems to be tamed at last?”