22% of businesses cannot deal with another interest rate rise as rate hits 4.25%

The Bank of England has raised interest rates for the 11th time in less than 18 months. Following yesterday’s surprise jump in inflation, interest rates have risen from 4% to 4.25%.

With interest rates going up again, the Bank of England hopes to drive inflation down.

However, Pietro Castelli, Head of Finance at Board, says the rise will place further pressure on businesses.

He comments: “New data by Board International reveals a fifth (22%) of businesses do not have the tools to deal with another interest rate rise. This is particularly true for younger businesses that didn’t live through the financial crisis of 2008 and have never had to plan for such a turbulent economy.

“There are lots of different ways companies can mitigate against economic fluctuations – increasing prices, changing suppliers, leaving, or entering new markets – but leaders must ensure that their planning and decision-making processes have the agility to deal with multiple scenarios and adapt quickly. In other words, they must develop a new set of planning muscles.”

Daniel Jones, Corporate and FX Dealer at Moneycorp, concurs: “Today’s decision will result in even tighter trading conditions for UK SMEs, potentially wiping £12bn from the economy and pushing it over the edge. The Bank of England’s separate plans to end favourable lending treatment for small businesses will only add fuel to that same fire.

“And this is coming on the tails of another shock rise in inflation, and the consecutive demise of Silicon Valley Bank and Credit Suisse, all of which have highlighted just how fragile the financial system is. In such a context, it’s time to see more – not less – support for SMEs, and urgently.”

However, Jonathan Moyes, Head of Investment Research at Wealth Club, says the Bank’s hands have been tied by the 0.25% rate rise in the US and the higher-than-expected UK inflation print earlier in the week.

He continues: “We understand why there is a growing chorus of commentators calling for a pause here. The US and Europe have come very close to a banking crisis over the previous two weeks and monetary conditions will tighten significantly as a result, placing further strain on the sector. We will have to wait for the May report to get the MPC’s full assessment of the recent turmoil, however, it is pleasing to see the FPC reiterate its confidence in the strength of the UK banking sector.

“With inflation expected to fall rapidly in the near term and interest rates close to their peak, it seems the inflation beast has been tamed. However, we may soon discover “the cure is worse than the disease” as the banking sector groans under the weight of aggressive rate rises.”

When will inflation go down?

After hitting a 41-year high of 11.1% in October 2022, inflation started to come down and fell to 10.1% in January. However, data released by the ONS yesterday found that it had gone up 0.3%, rising to 10.4% in February.

The ONS said the continued rise in food costs was a big factor in February’s inflation figure and comes at a time when there are shortages of some salad items and vegetables in supermarkets.

Phil Smith, Managing Director of Business West, comments on how rising inflation is affecting consumers and businesses.

He says: “The unexpected increase in the CPI rate to 10.4%, reversing three months of progress, is a reminder that the squeeze on business and consumers is far from over.

“While prices are increasing across the board, soaring food prices were largely responsible for the latest jump, which is being fuelled by rising energy costs and wage increases. The longer this continues, the greater the impact will be on both businesses and consumers.

“Our quarterly survey at the end of last year showed two-thirds of businesses finding inflation as their top concern, and whilst our most recent survey shows that concern has decreased slightly, cost inflation remains a top worry for over half of firms.

“The March budget indicated little in terms of a long-term plan for businesses facing these unprecedented price increases. We would like to see more support for firms including a transition to more energy efficient sources or improving our trade relationships and easing supply chain difficulties.”

Mohsin Rashid, CEO of ZIPZERO, said: “Yesterday’s surprise announcement that inflation is once again rising quashed any possibility of the Bank pressing pause on interest rate hikes.

“The issue right now is not that no one can win, certainly energy companies are making a fortune, but that too many are losing. For homeowners on variable mortgage interest rates, this latest hike is yet another blow which may lead to repossession.

“Meanwhile, households cannot continue to bear enduring inflation. The persistent rise of essential goods, especially food which yesterday’s figures revealed as a predominant perpetrator of overall inflation, is pushing households into poverty; people have run out of room to cut costs, and many are now having to skip meals.

“It is, therefore, imperative that the Bank does everything it can to tackle inflation. However, the damage these decisions inflict upon households is unforgiving. With support shortcoming, those seeking to improve their financial security must search for novel tech solutions which can unlock new money-saving opportunities.”