Interest rates hit 1.25% – is a recession on the way?

Earlier today, the Bank of England raised interest rates from 1% to 1.25%. This follows last month’s increase from 0.75%, meaning the Bank of England has now raised interest rates for five consecutive months since December.

Interest rates are now at their highest level since 2009, during the Great Recession.

Last month, inflation reached a 40-year high of 9% in the UK as rising fuel and energy prices took their toll, and experts have warned that inflation could go higher than 10% by the end of the year.

Industry reaction

Rob Clarry, Investment Strategist at Evelyn Partners, commented on the Bank of England’s interest rate decision.

He said: “The Bank of England increased interest rates by 25 basis points to 1.25% at their June monetary policy meeting. This decision was consistent with market expectations and marked the fifth rate rise in as many meetings. The Bank of England faces an unenviable challenge. With inflation reaching a forty-year high of 9% in April and sterling recently hitting a two-year low against the dollar, the MPC needed to act to reduce price pressures and support the currency.

“However, recent disappointing growth data meant that the MPC refrained from raising interest rates by 50 basis points. The UK economy recorded a 0.3% contraction (month on month) in April, which contrasted with the Bank’s positive growth forecast. Meanwhile the services and manufacturing PMIs ─ bell weathers for economic activity ─ fell sharply in May, signalling further challenges for the economy.

“Ultimately, as UK economic activity continues to slow, we view that the market remains too hawkish in its assessment that rates will continue to increase throughout the year. Instead, we think the Bank of England will be forced to hit the pause button later this year to prioritise growth over fighting inflation.”

However, George Barnes – expert tech recruiter and Co-founder of Hamilton Barnes – believes that the expected economic downturn will pass the tech industry by.

He said: “More turbulence on the horizon for businesses and the public as BoE announces 1.25% inflation rate, up from 1%. It is likely that we aren’t far off a recession, with the rates needing to crash at some point. Businesses are undoubtedly concerned about what this means for the future, with purse strings needing to be tightened. However, I truly believe that a recession will not affect the Tech sector.

“In the Tech sector, clients are hiring faster and in greater volumes than ever before to keep up with demand from consumers, all of whom are looking to adopt a data-first culture to outrun their competitors.

“There are 30,000+ cyber security vacancies alone in the current market, and those roles will need to be filled if companies are to remain ahead of the game. If it’s a choice between spending money on top-quality tech talent and becoming a market leader or being cautious and potentially being unable to pull themselves out of a hole post-recession, tech companies are 99.9% likely to opt for the former.

“Additionally, other aspects come into play within this, other than just hiring. For example, the industry has seen a major chip shortage since the start of the pandemic and companies have seen wait times of anywhere between six and 12 months before they pay for and receive the chips needed. From the provider’s point of view, this means that they haven’t been receiving revenue for six – 12 months. We’re about to see a huge backlog break through with high amounts of revenue streaming in, which is only going to be positive for the industry.”

“When will these rate hikes stop?”

Adrian Anderson, Director of property finance specialists, Anderson Harris, keeps getting asked one question regarding the interest rate rises.

He commented: “The interest rate hike today to 1.25% is no surprise after the US made its biggest interest rate rise in almost 30 years yesterday. Inflation is running red hot and this interest rate rise means higher borrowing costs for mortgages, credit cards and other loans.

“The question I keep on being asked is ‘When will these rate hikes stop?’ and I don’t think the MPC knows the answer to this question. The Bank of England is playing catch up as at the beginning of the inflation crisis we were told this is a temporary issue due to supply chain problems and this is clearly not the case.

“This is not a UK problem but a huge change for the global economy as Australia, Canada, and Brazil have also raised rates and the European Central Bank has outlined plans to increase rates over the summer.

“We are encouraging homeowners to remortgage as early as they can and are contacting our clients six+ months in advance rather than the usual three to four months before a rate renewal due date.”

Freetrade Analyst Gemma Boothroyd also commented on the interest rate rise.

She said: “The market saw this one coming. Even before the rate rise, UK banks had a skip in their step earlier in the week. After all, they’re the ones primed to benefit here but selectivity is the name of the game now more than ever. UK banks were not created equal and those with huge mortgage books will start to look very different from trading-heavy firms.

“Mortgage lenders will raise rates, making buying a home more expensive. That’s bad news for Britons looking to get a leg up on the property ladder, but good news for the banks’ coffers. Renters might see their monthly payments taken up a notch. If a landlord can legally raise rent, they probably will.

“As for credit card payments, interest charges could get bumped up too. It may be a few payment cycles before that happens though, and you would be informed if it did.

“The rate rise will ripple through the market, hitting firms with differing intensities. We’ve already seen companies in growth mode take a share price hit as lofty valuations look even harder to justify amid rising rates. Now, the sting will probably be felt among even the reasonably priced companies.

“We’ve been here before. And if you have a long-term investment horizon, this is a storm a diversified portfolio should be able to weather. Lower-priced shares for good companies might be a good buying opportunity. That’s especially the case in the UK, where shares are trading at valuations well below those across the pond.

“So, it’s not all bad news. There’s an opportunity to take advantage of a drop in the market if you have a long-term outlook for your investments. That’s not to say every share price fall should be seen as a deal, but it’s worth keeping a keen eye out for the companies seemingly being unfairly punished.”

How will SMEs be affected?

Ross Gandy, UK Managing Director of property investment and financing platform Estateguru, comments on what impact today’s interest rate rise will have on SME lending.

He said: “With interest rates yet again on the rise, SMEs will be feeling the pressure. Growing costs naturally contribute to an increased demand for working capital, but in times of economic turbulence, traditional banks tend to tighten up and shy away from lending to small businesses. Traditional lenders have strict, one-size-fits-all underwriting criteria which grows ever more restrictive as times get tougher, automatically ruling out a lot of SMEs.

“Thankfully, there are other options available to SMEs looking to secure funding. Alternate lenders take a far more holistic approach to the underwriting process and deal with applications on a case-by-case basis, taking into account the individual needs of the applicant in the hopes of finding a solution that suits them best. Alternate lenders understand securing capital shouldn’t be a tick box exercise that is reliant on algorithms, but a far more intricate process that requires more consideration.”

Rachel Winter, Partner at Killik & Co, also commented: “We’ve now had five consecutive rate rises as the Bank of England faces unprecedented public pressure to bring inflation under control. It’s notable that policymakers decided against following their US counterparts in imposing a larger increase.

“This is clearly a huge balancing act for our central bank. Figures suggest the UK will have the highest inflation in the G7 into 2024, not least because of persistently high energy prices. It presents a serious challenge in taming a wage-price spiral. Employees are understandably requesting higher wages to cover the higher cost of living, which in turn will cause firms to raise their prices.

“On the other hand, the UK economy is shrinking faster than expected and is at serious risk of going into reverse. This latest decision shows the Monetary Policy Committee is very mindful of applying too much pressure on the brakes.

“Given the pace of inflation, the rise in rates provides only a modest boost for cash savers. A long-term investment strategy may be more appropriate to help maintain the value of savings as we face a potentially prolonged period of uncertainty.”