Interest rates increase to 5% – business industry reaction

The Bank of England has hiked interest rates by 0.5 percentage points to 5%.

Rates have now hit the highest level in 15 years it’s the 13th time that the Bank of England has increased bank rates, with its Monetary Policy Committee (MPC) voting by a majority of seven to two to raise rates by 0.5%. 

Responding to the Bank of England’s latest Bank Rate decision FSB National Chair Martin McTague said “The Bank of England (BoE) is risking economic slowdown across our small business community, with a jarring 0.5% increase in interest rates. We are standing at a crossroads. Inflation and interest rates are unrelenting.”

“An increase in interest rates comes as no surprise – it’s a tried-and-trusted lever to pull in such times – but the size of the increase will hurt, and rate rises are not a magic wand in reducing inflation. This was driven by the highest core CPI rate in 30 years, but it has significant repercussions for everyone, not least for the 1.5million on variable mortgages.”

“While higher interest rates are a tool to control inflation, the weight of escalating costs means consumers have less disposable income to circulate in the economy. When the money in their pockets is worth less, the upshot is reduced sales for businesses.”

“It’s like adding another heavy load to an already full plate. Banks have a responsibility to show understanding and patience, especially to those who took variable-rate Coronavirus Business Interruption Loans (CBILS) and are now faced with higher costs. Instead of treating loans as just another expense, we need to think of them as a lifeline to keep small businesses trading during these challenging times.”

“High street retailers, start-ups, local bakeries, and tech innovators alike are all feeling the pinch. As the weight on the small business and self-employed community grows heavier, we must strike a delicate balance. Our entrepreneurs need room to breathe, room to innovate and crucially room to grow.”

“To help consumers and businesses, the Government could raise the VAT threshold from £85,000 to £100,000. This move could cushion some of the hardest blows of inflation, preventing tax increases from exacerbating the impact of price hikes on businesses and in turn, their customers.”

“Meanwhile, energy suppliers should allow firms to ‘blend and extend’ their contracts so they can take advantage of lower wholesale prices. Late payments should also be a top priority, as unpaid invoices can stifle growth and stability.”

“Our latest Small Business Index (SBI) survey reveals a stark snapshot of our current economy. We are seeing a divide, where 40% of firms encountered a dip in sales in the first quarter of 2023, while a third managed to increase them.”

“This is a testament to the resilience and determination of our small business community – 46% of them said they were optimistic for the upcoming quarter.”

“However, rising interest rates are not just numbers on a page, they are lived realities that influence consumer behaviour. The BoE should proceed with caution, mindful of these broad-ranging effects.”

Reacting to the Bank of England decision to raise the base rate to 5%, BCC Head of Research, David Bharier, said “With CPI inflation stubbornly higher than forecast at 8.7%, it was expected that the Bank would increase the interest rate further.”

“But, while inflation is still the top concern for businesses, interest rate rises are now causing worry for a rapidly growing number of firms with soaring borrowing costs. Businesses will need clarity on the direction of further changes.”

“There are several drivers of inflation which could be eased by a policy response. For instance, unprecedented tightness in the labour market is causing firms to bid up salaries, and trade barriers with the EU are driving up costs.”

“The BCC has been urging the Government to act on these issues for over a year and is ready to work in partnership with it to ease labour shortages and reduce trade barriers.”

“High inflation, high interest rates and slow growth will be a lethal combination for many. Fundamentally, solutions need to be found beyond the interest rate lever.”

Mark Supperstone, Managing Partner at ReSolve, said “This further rise in interest rates will only put greater pressure on businesses that are already struggling. The recent ONS statistics on insolvencies highlighted this and we are seeing it with our clients with more businesses continuing to come to us looking for a solution.”

“Two sectors in particular are really struggling, technology and leisure. Higher cost of debt is proving a real challenge for tech businesses, many of which are loss making, which combined with investors pulling back on funding is pushing many into a restructuring or insolvency process. The leisure sector is also continuing to face real difficulties. As evidenced by our recent appointment as Administrator to London Irish many are still coping with the aftereffects of the pandemic and with this rise in interest rates likely to reduce disposable incomes for those with a mortgage, this is going to cause more pain for the sector. Inflation needs to be brought under control and it is likely that more pain will be experienced by businesses over the coming months.”