Interest rates held flat at 5.25% – business industry reaction

22nd September 2023

The Bank of England has announced that it has held interest rates at 5.25%, pressing pause on rate hikes after rising relentlessly since December 2021, ending a fourteen-meeting run of rate rises.

The.MPC voted 5 to 4 in favour of holding rates steady, with four members preferring a 0.25% rise to 5.5%.

Commenting on the decision, Federation of Small Businesses (FSB) National Chair Martin McTague said “Small firms will be profoundly grateful to hear that the relentless upward march of the base rate has finally paused. Now the hope is that the peak has been reached and passed, and that – in due course – rates begin to fall.”

“It’s been a long slog to get to this point, and many small firms have suffered financially along the way, with margins and cash reserves battered by both the phenomenon the Bank tried to control, inflation, and the ‘cure’ it applied in the form of fourteen consecutive rises in the base rate, leading to higher borrowing costs and dampened consumer demand.”

“Yesterday’s inflation figures showed a welcome fall in core inflation, although prices at the pump are ringing alarm bells. The higher cost of filling a tank could lower consumer spending, with people put off from visiting their local high street, booking a weekend trip, or going for a meal out. A jump in freight and transport costs could also add yet more pressure to margins for businesses in all sectors.”

“Last week’s unexpectedly large drop in GDP is a sign that the painful interest rate rises we have endured are acting as predicted, and we urge the Bank to allow time for the lag between rate hikes and the full effect on spending to be fully observed, so that there is less risk of overshooting and causing unnecessary economic damage.”

“Small firms need some respite, and now will look to the Autumn Statement for signs from the Government that it’s listening and understands their concerns. As a nation, we urgently need action to stem late payments, which are used by large corporates to offset interest rate rises by demanding, in practice, free credit from their supply chains.”

“We’re also calling for an overhaul of business rates and an extension for the 75% discount for SMEs in retail, hospitality, and leisure, due to expire in April, as it is these consumer-facing sectors which have been especially acutely affected by falling confidence levels and economic headwinds.”

Kitty Ussher, Chief Economist of the Institute of Directors, said “Business leaders will welcome today’s decision to keep interest rates on hold. It has become increasingly clear over the summer that the Bank’s action to date is having the desired effect of constraining demand and bringing down inflation expectations. That’s why, for the first time, the IoD called for a pause today.”

“The economy shrank in July and both core and services inflation came in lower than expected in August. This combined with a more difficult external environment, negative PMI results, a weakening labour market and the anticipated fall in the Ofgem energy price cap in October means that inflation is likely to be substantially lower by the end of the year, and within sight of the Bank of England’s 2% medium-term target in 2024.”

“To tighten further would therefore have risked administering an overdose before the existing medicine has had enough time to fully take effect. This is not to say that further calibration may not be needed in future, but it is too early to make that judgement today.”

Theo Chatha, Chief Financial Officer at Bibby Financial Services said “The decision to hold interest rates at their current level is welcomed. But, while businesses might breathe a sigh of relief at this pause, the future remains unclear – and we’re certainly not out of the woods yet.”

“The reality is that rates remain the highest they have been in 15 years, which is having a particularly acute impact on the UK’s 5.6 million SMEs. Six in ten (61%) of SMEs owners we recently surveyed named inflation and rising costs as their number one concern, and today’s rate hold won’t change that.”

“Inflation must be tamed, but it’s critical that policymakers avoid simultaneously damaging business confidence to the point it undermines growth. We would urge the Government to examine the support it can offer SMEs. Small businesses we talk to tell us they’d welcome tax incentives and low interest grants. We’d also encourage the Government to communicate more clearly with SMEs about how they can access finance.”