Record High: UK Interest Rates Soar to 15-Year Peak Amid Inflation Surge

The Bank of England (BOE) has declared that the UK interest rate has increased to 5%, its highest level in 15 years. Many had hoped for a smaller rate rise. This comes as the official inflation rate for the UK remained at 8.7% in May, significantly over the Bank’s aim of 2%.

A difficult juggle

This is a serious blow to companies in the middle of the already difficult balancing act between inflation and recession. The economic challenges are underscored by persistently high prices and very modest rises in GDP numbers.

This hike serves as yet another warning to SMEs to examine their current credit arrangements and make sure they are ready to face new difficulties. With interest rates rising, SME’s with current loans and corporate credit cards will have to pay more in interest, which will have a negative impact on cash flow, with less money to spend and more expenses.

Hope on the horizon

According to economic theory, when interest rates rise, consumers will find it more costly to borrow money, leaving them with less money to spend. when a result, families would make fewer purchases, which will lower the cost of living. The BOE governor says he expects inflation to fall “significantly” this year.

Experts offer comment

Commenting on today’s interest rate decision from the Bank of England, Debapratim De, senior economist at Deloitte, said:

“Today’s interest rate decision points to growing concerns within the Bank of England that price pressures might take longer to unwind than previously forecast.

“By surprising markets with a sharper rise than predicted, the Bank will be hoping to stabilise rate expectations, which have risen significantly in the past few weeks. If growth and inflation continue to surprise on the upside, that objective might prove difficult to achieve.”

Ellie Sawkins, Investment Analyst at Wealth Club says,

“The Bank has moved onto the front foot this month, raising the base rate by 0.5%. While an increase in rates was all but guaranteed following this week’s sticky inflation figures, sentiment was divided over how high the Bank could go. Too small an increase and the Bank risks being labelled ineffective but too large and it could drive the economy into recession.

“By a wide margin, the MPC voted for the latter, although opinion was split with two members voting for a hold. Headline inflation was a key driver behind today’s decision, having defied expectations to hold steady at 8.7%. At the same time, core inflation, which strips out more volatile energy and food prices, has continued its march higher, rising at its fastest rate since 1992.

“Looking for the positives, real GDP increased in Q1 2023, marginally ahead of expectations and the Bank continues to forecast inflation falling significantly during the course of the year, with food prices in particular, expected to calm.

“However, in what has objectively been a difficult week for the Bank, it has continued its tightrope walk between stubborn inflation and an increasingly fragile economy, albeit with small steps. But one wrong move and the consequences could be painful.

“Whilst a 0.5% rise will be grim reading for mortgage holders, spare a thought for those in Turkey, where the central bank has just raised interest rates by 6.5% to 15%!”

Mike Randall, CEO of Simply Asset Finance says:

“Another hurdle for businesses as interest rates see a thirteenth consecutive rise. While this will certainly strike a chord with firms across the country, we’re seeing resilient business owners are already factoring this into their future operations.

“We know many small firms are already taking the opportunity to adapt their business models to counteract rising rates, but it’s vital they don’t put future investment decisions on hold. With small businesses accounting for 99% of the UK business population, and economic growth far below expectations, their success will be closely tied to future recovery”

“It will take more than surging interest rates to slow SMEs down, but business leaders needn’t run the race alone. With the SME funding gap continuing to grow, the fact remains that SMEs need access to prompt and efficient specialist finance in order to keep the impact of future rate increases at arm’s length.”

Michael McGowan, Managing Director of Foreign Exchange, Bibby Financial Services:
“Today marks the Bank of England’s thirteenth consecutive interest rate rise in a row, which is more than unlucky for the UK’s 5.5 million SMEs. British businesses are still battling with a very murky economic outlook, and this 0.5% percentage increase is unhelpful in the extreme.

“As inflation remains stubbornly high, questions have to be asked as to whether these consistent gradual rises are having the desired effect. Perhaps a policy of less frequent but higher increases would have had a greater impact on the process of managing inflation. UK businesses are now trapped in a cycle of uncertainty which makes planning very difficult. This problem is even more acute for companies trading internationally, as the latest interest rate rise further exacerbates the volatility inherent in FX markets.”

Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said:

“Better savings rates are the silver lining to come from persistently high inflation. As a result, customers loyal to high street banks are potentially paying a high price for their loyalty by missing out on better rates.

“With the average easy-access rate sitting at 2.3%, there is often a big gulf between average rates and the top deals that can be secured by looking beyond the high street and also considering fixed-term products. Today’s latest hike, already priced into some savings products, only makes it more important that people consider all their options.”

CEO of Recognise Bank, Jean Murphy, was less surprised by the move, offering her thoughts on the BoE decision.

“This Base Rate increase of 50bps was not totally unexpected and unfortunately places increased burden on variable rate borrowers adjusting to broader cost of living pressures. It also however should see savings rates adjust upwards too. Rising prices are damaging to everyone though so hopefully this represents another step towards a decrease in inflation.”

Dr Tony Syme, macroeconomic expert, University of Salford Business School, comments:

“Following yesterday’s news that inflation remained static at 8.7%, the Bank of England has responded by putting up interest rates for the 13th consecutive time.

“Given that last month’s fall in inflation was explained entirely by last April’s 50% rise in gas and electricity bills falling out of the calculation, there is plenty for the Bank of England to be worried about. The UK has the highest inflation rate in the G7 and, within the G20 countries, only Turkey and Argentina have higher rates of inflation.

“In last month’s Monetary Policy Report, the Bank of England blamed high inflation on two factors: Russia’s invasion of Ukraine leading to big rises in the prices of gas and food basics, and unfilled job vacancies leading to high wages.

“The first factor may explain why inflation is higher in the UK than elsewhere. The UK has a greater reliance on gas for heating homes than elsewhere – 85% of British homes are currently heated by gas – so UK inflation is strongly impacted by changes in the international gas prices. And in terms of food, the UK is the world’s third largest net importer of food and drink, according to the Food and Agriculture Organization of the United Nations. This is another factor that means UK inflation is largely driven by international rather than domestic factors.

“To reduce this dependency on the primary causes of the current inflation require not interest rate rises, but investment in sustainable energy and food production. Higher interest rates will only harm that investment.

“What of the Bank of England’s vacancies and wages argument. Last week’s Labour Market Overview by the ONS reported that vacancies fell for the 11th consecutive period. This is at odds with the Bank of England’s “lots of job vacancies, and employers are having to offer higher wages to attract job applicants” argument. The report also highlighted a record number of people of employment, with increases in both the number of employees and the self-employed.

“Wages have risen by less than the rate of inflation since August 2021. This is a sign of the economic distress that households have faced over the last couple of years. It is not a sign that they have caused that inflation. And yet the Bank of England continues to raise interest rates, continuing to put households under more stress.

“Is it effective? No. The primary causes of the current inflation are international and require investment to address, even if that is a longer-term view.

“For 13 consecutive times, the Bank of England has put up interest rates hoping to bring inflation under control, but without success. They are doing the same thing over and over and expecting different results. It’s time for a different remedy.”

Lily Megson, Policy Director at My Pension Expert, said:

“When the Chancellor is advocating for more interest rate pain as a necessarily evil to bring about a recession and, in turn, curb inflation, you get a clear indication of the worry state of the UK economy. This will do nothing to help Britons’ financial confidence – particularly those approaching retirement.

“The priority for many pension planners is to protect the value of their hard-saved money. Some may opt for securing a fixed income via an annuity, which are now offering much improved rates, while others may move some or all their money into higher risk investments in an attempt to “recession proof” their retirement finances. However, if major changes are made without the right help, savers risk making ill-informed decisions.

“While the government has made it clear that it will not intervene where interest rates are concerned, it could do more to ensure consumers don’t feel pressured or panicked into making ill-informed decisions. Making sure pension planners have access to affordable independent financial advice would be a strong start. Such support would be a financial lifeline to many, helping savers understand their current situation, and the steps needed to achieve the retirement they want even as rates rise and inflation persists.”

Michael McGowan, Managing Director of Foreign Exchange at Bibby Financial Services:

“Today marks the Bank of England’s thirteenth consecutive interest rate rise in a row, which is more than unlucky for the UK’s 5.5 million SMEs. British businesses are still battling with a very murky economic outlook, and this 0.5% percentage increase is unhelpful in the extreme.

“As inflation remains stubbornly high, questions have to be asked as to whether these consistent gradual rises are having the desired effect. Perhaps a policy of less frequent but higher increases would have had a greater impact on the process of managing inflation. UK businesses are now trapped in a cycle of uncertainty which makes planning very difficult. This problem is even more acute for companies trading internationally, as the latest interest rate rise further exacerbates the volatility inherent in FX markets.”

Jatin Ondhia, CEO of Shojin, said:

“Rate-setters have delivered yet another blow today in their relentless battle against inflation, which continues to overpower the Bank of England’s fiscal policy. With forecasts signalling that further hikes could be on their way, the Bank’s ‘do what it takes’ approach – which has the backing of the Chancellor – will ring alarm bells for many.

“Higher borrowing costs will continue to squeeze homeowners and property investors, which in turn will lead to more buy-to-let investors exiting the market and increase rental costs due to a dwindling supply of property. The impact of this will be felt far and wide. Renters in high-demand areas like London are already spending 40%-50% of their salary on rent. We can only hope that inflation starts to settle soon, but I expect more pain before relief comes.

“Interestingly, property values remain underpinned by a shortage of supply. In good locations and at the right price point for local markets, cash buyers are still out there, while mortgage buyers are accepting the new norm of higher interest rates and factoring that into their purchasing decisions. The past decade of ultra-low interest rates and cheap borrowing is well and truly over and we are seeing a return to more “normal” rates, which all borrowers have to get used to. For existing borrowers, the Chancellor has ruled out direct government assistance but is meeting with banks on Friday to find ways to soften the blow. Let’s hope they come up with something sensible otherwise we could see an increase in defaults which have so far been muted.”

Chad Rogerson, Director at Newton Europe comments:

“Interest rates continue to climb as the Bank of England tries to tame inflation – but cost-of-living woes are going nowhere. People across the UK are facing financial insecurity as their bills rise and their real wages stagnate – and this is especially true of mortgage-holders who are facing an average two-year fixed-rate deal of more than 6%.

“With over 800,000 households1 coming to the end of their mortgages in the coming months, and faced with much higher rates than before, many will be searching for the best deal to remortgage their homes. In the digital age we live in, the vast majority will remortgage online – which should be the simplest, most efficient way to do so. However, this isn’t the case for all. Newton’s new Vulnerability Void report reveals that nearly one in five (22%) vulnerable customers found remortgaging online to be a difficult process – this is three times more than those without vulnerable characteristics (7%). This was largely due to people feeling anxious during the process, finding the process too long, and not understanding what the website was trying to tell them.

“With the FCA’s Consumer Duty legislation fast approaching, mortgage providers must do better. Taking a psychology led approach to better understand customer support needs is the answer for how to design more inclusive journeys for all, which is why we developed Newton’s Online Vulnerability Assessment. If Mortgage providers fail, they not only risk regulatory consequences, but they will continue to disadvantage and isolate vulnerable customers from buying products online.”

Chieu Cao, CEO of Mintago, said:

“It already felt like we were on the edge of a cliff when it comes to Britons’ financial wellbeing, but yesterday’s inflation and today’s base rate hike will push many people over the edge and onto the rocks below.“

“Businesses need to be prepared – as much as their costs are rising as well, it’s their staff who are going to feel the harshest effects of high interest rates and the cost-of-living crisis. That’s why employees require considered, robust wellbeing support; support that is regrettably lacking among many employers at present.

“In truth, too many businesses still see financial wellbeing support as a ‘nice to have’, but it’s a necessity right now. Employers must recognise the detrimental impact that financial stress can have on employees’ productivity, mental health, and overall wellbeing, and provide them with the tools they need to manage their finances as effectively as possible.”

Joseph Calnan, Corporate FX Dealing Manager at Moneycorp, comments:

“Today’s hefty interest rate hike will hit all borrowers hard, but homeowners are set to bear the brunt of it.

“The cost of the average 2-year fixed rate residential mortgage has risen already this week, up to 6.19% today from 6.15% on Wednesday. This is alarmingly higher than the 5.26% we were looking at in May before concerns over UK inflation started rapidly driving up borrowing costs.

“It’s being widely observed that the Bank of England’s failure to tighten monetary policy early enough has brought us to this position, which is why inflation is remaining so stubborn. And, the fact that core inflation is actually increasing points to a more systemic issue, meaning we’re like to see an ongoing hawkish position from the BoE and a number more hikes to come.

“On the business front, UK SMEs relying on overseas income are likely to struggle too. The pound has been gaining strength on the expectation of a further hike today, making UK products & services more expensive to international clients, and this larger rate hike should certainly accelerate that trend.

“A further 0.5% is a tough pill to swallow and the Government must offer meaningful support to homeowners and businesses to help them through this painful time.”

Commenting on UK interest rates Douglas Grant, Group CEO at Manx Financial Group PLC says

“Fears were confirmed this morning with the Bank of England announcing a 5% base rate, a severe blow to businesses, amidst the already challenging balancing act between inflation and recession. Stubbornly high inflation and only small increases in GDP data have highlighted economic hardship that may be difficult to shake off. SMEs must take this as yet another reminder to review their existing lending structures and ensure they are prepared for further challenges.

“Many SMEs prepared for these hikes by listening to lenders and locking in their debt into fixed rate structures, but other businesses that were not as forward-thinking face significant uncertainty. According to our recent research, 40% of SMEs – compared to 27% last year – have had to stop or pause an area of their business due to a lack of external financing. The unavailability of finance is exacting a toll on SMEs and the UK economy, impeding growth precisely when it is most needed. The magnitude of the hindered growth is substantial and calls for novel solutions to bridge this funding gap.

“Since the economic upheaval caused by the pandemic, we have been advocating for a government-backed loan scheme that provides targeted supported for specific sectors, bringing together both traditional and alternative lenders to secure the future of SMEs. As the government looks for ways to curb the highest rates of inflation in decades, the significance of implementing a permanent scheme cannot be underestimated.”