UK may already be in recession, interest rates rise by 0.5% – business industry reaction

The Bank of England has raised interest rates from 1.75% to 2.25% – the highest level for 14 years and warned the UK may already be in a recession.

The central bank had previously expected the economy to grow between July and September but it now believes it will shrink by 0.1%.

The Bank of England Monetary Policy Committee has voted to increase interest rates to 2.25 percent, a rise of 0.5 percentage points.

Commenting on the rise, Federation of Small Businesses (FSB) National Chair Martin McTague said “With the latest inflation figures showing only a small decrease from recent record highs, this rise in the base rate feels in many ways like it was inevitable. However, the further pain it will cause many small businesses and self-employed people cannot be ignored.”

“Many small firms which took up funds via CBILS will be on variable rates, but do not have the protection offered by Pay As You Grow, which helps borrowers manage and spread out repayment stress. More widely, commercial loans which are pegged to the base rate will rise, eating away at margins which are already under enormous pressure from inflation, sky-high energy bills, and slumping consumer and small business confidence.”

“FSB figures show that small businesses’ perception of credit availability and affordability is firmly in negative territory, and decreased between the first and second quarters. The interest rates paid by small firms have also increased, while acceptance rates for new credit applications fell. Yesterday’s announcement of support on businesses’ energy bills will help many, but is yet to arrive and may not be enough for thousands of firms who agreed to new or renewed contracts before the 1 April cut-off at a much higher price than they were previously paying, and for those who signed up after that date but who have been facing half a year’s-worth of vastly costlier energy prices.”

“The mini Budget tomorrow is a chance for the Chancellor to make a strong statement in support of small businesses and self-employed people, with today’s eye-watering rise a clear illustration of the scale of the challenge.”

“Overhauling business rates, reversing the NICs increases, cutting fuel duty, and making sure more small businesses are not caught up in Corporation Tax would all be very welcome measures.”

“On the non-fiscal side, action to stem late payments through greater accountability and transparency for big corporates, and a commitment to smart and responsive deregulation would pay huge dividends without costing the public purse.”

Kitty Ussher, Chief Economist of the Institute of Directors, said “Expectations of future inflation are still not where the Bank of England would like them to be. Many of our members think that the peak will come next year, and so may price accordingly, running the risk that inflationary expectations become self-fulfilling.”

“Combined with imminent announcements of a government stimulus package, plus some remaining – albeit smaller – upward pressure on CPI from household energy prices next month, the Bank of England has made the judgement that interest rates need to continue rising.”

“However, the MPC also pointed to recent data showing the UK economy flatlining over the summer, and early signs that labour vacancies may have peaked. This explains why most MPC members chose to raise rates at the lower end of market expectations rather than follow the US and eurozone and go for a higher 0.75 percentage point rise.”

“The key question for the months ahead is whether inflation can be tamed without entering recession. With a government determined to go for growth in a rising interest rate environment, that’s still all to play for.”

Suren Thiru, Economics Director for ICAEW, said “Another significant jump in interest rates is likely to hasten the UK’s fall into recession. Raising rates at this speed will inevitably have a chilling effect on the economy by further diminishing consumer and business confidence and increasing the financial squeeze on many borrowers.”

“While the growing divergence between monetary and fiscal policy highlights the tough trade-off between soaring inflation and an ailing economy, it also exposes the muddled approach among policymakers in tackling these headwinds, undermining their credibility among consumers, firms and investors.”

“Friday’s mini budget must set out a clear and credible tax and spend plan that explains how any fiscal support will be paid for, otherwise international confidence in the UK may fade quickly, weakening our economic prospects further and intensifying the strain on public finances.”