UK interest rates hike: leader’s reactions and what it means for your business

UK interest rates raised to 4.5% as the Bank of England battles inflation. While many predict this will mark the end to the consecutive run of hikes, further action is crucial to correct record inflation highs.

Rise up

Junaid Mujaver, Partner of Financial Services at consultancy Newton warns of illiteracy regarding what interest rate fluctuations mean for finances, with one in five not aware of the impact on borrowing.

Key stats from ‘The Vulnerability Void’ campaign from Newton include the following alarming statistics. Close to a third of those surveyed (32%) are not aware that rising interest rates equate to higher borrowing costs – with 20% believing interest rates have no impact on the cost of borrowing, and 12% thinking that as interest rates rise, borrowing gets cheaper.

This is especially true of the younger generation, with 44% of Gen Z believing that higher interest rates have no impact on the cost of borrowing. Conversely, this number is only five percent for Baby Boomers, likely a result of being exposed to periods of higher interest within their lifetime.

Robert Young, Director, Restructuring & Insolvency at Azets thinks businesses will likely feel the pinch from both sides as their own cost of borrowing may increase further whilst consumer demand may reduce given this further cost-of-living squeeze.

“The increase in borrowing costs will be particularly stark for businesses which do not have a great pool of assets against which lending can be secured. Whilst it is perhaps in everyone’s interests to drive down inflation, there will be widespread concern in view of the high levels of gearing (both personal and business) and given the various other stubborn headwinds which persist in the UK and across the globe,” he says.

Fixed vs variable rate

Commenting on the outlook for SMEs, Douglas Grant, Group CEO at Manx Financial Group PLC, said today’s interest rise is yet another blow to businesses struggling to manoeuvre as cashflows are squeezed.

“Stubbornly high inflation and flatlining GDP data highlighted sluggishness that may be difficult to shake off. Indeed, coupled with the global banking sector showing signs of weakness, 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 research, more than 20% of SMEs in the UK that sought external financing in the past two years were unable to obtain it. Furthermore, over 25% of SMEs had to halt or postpone certain aspects of their operations due to a lack of funding.

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,” he adds.

Robert Young, Director, Restructuring & Insolvency at accountancy firm Azets, the UK’s largest regional accountancy and specialist business advisor to SMEs, said:

“This rate rise will cause some alarm to SMEs given that, in early March, market commentators – and the Governor of the Band of England himself – suggested that rates may have peaked after 10 successive increases.

“We now have the highest rates since 2008. Whilst many will state that the rate is not high in a historical context, the feeling will be very real for the approximately 1.5m UK homeowners on a variable rate mortgage and the millions that will see their fixed rate expire this year. This will have an inevitable knock-on effect on discretionary spending across the UK.”

No end in sight

Joseph Calnan, Corporate FX Dealing Manager at Moneycorp thinks that while the rate hike is being billed by many as the last in what’s been a relentless cycle, it is difficult to justify an end in the current context, despite the implications for consumers and businesses.

“In time, once the growth outlook is more upbeat and the medium-term inflation path shallower, the Bank of England can perhaps afford to switch to more infrequent rate hikes. But for now, with CPI stubbornly staying over 10%, further corrective action will be crucial – whether that’s through more rate rises or quantitative tightening.

“The Bank of England has one job: reduce inflation to the Government’s 2% target. They must focus on doing it, whether that makes them popular or not.”

Junaid Mujaver, Partner of Financial Services at consultancy Newton, commented: “However, a significant proportion of the population doesn’t know or understand what the interest rate and its fluctuations mean for their finances. The data shows that this is noticeably high amongst those identified as ‘financially vulnerable’, with almost half (46%) incorrectly believing that higher interest rates either don’t impact the cost of borrowing money or make the cost of borrowing money lower. ”

George Lagarias, Chief Economist at Mazars comments that the increase was hardly news. The UK boasts the fastest wage growth and one of the tightest labour markets within developed markets, meaning that inflation is becoming ingrained.

“The Bank of England has little alternative other than tightening the money supply, in order to curb consumer demand. Homeowners who were eagerly waiting for their refinancing rates to drop may be in for a disappointment. Unless we see a financial accident that could affect the banking sector, or some sort of other systemic event, we expect the central bank to continue to tighten rates, despite the economic slowdown,” he says.

Success still reachable for SMEs

“For small and medium-sized businesses, which form the backbone of the British economy and are our core client base, this further rate increase will add to the pain they are already experiencing with higher costs eroding margins and upward pressure on all costs.

Many businesses are banking on better times ahead and waiting for rates to fall, but for now they know they must tough it out for a while longer, says Simon Massey, Managing Partner at accountancy firm, Menzies LLP.

However, despite another financial blow after a tough trading month of bank holidays, studies are showing leaders remain as resilient as ever.

Mike Randall, CEO at Simply Asset reveals optimistic study results.

“71% of SMEs in the UK are still confident of business success, and 58% expect revenues to increase in the next quarter, according to Sage and Barclays. For SMEs it’s business as usual, but as industries such as manufacturing call for long-term strategies to ensure their future success, it will be crucial to consider how to minimise the impact of this high-inflationary environment for firms.”

 

Support is the answer

Chieu Cao, CEO of Mintago reveals people will need to adapt to what will be an ongoing challenging time.

“Even if today’s interest rate decision does contribute to reducing inflation in the long-term, it’s unlikely that the financial stress that many Britons are grappling with will be going away any time soon. So, it’s more important than ever that people are equipped with the tools they need to navigate what continues to be an incredibly challenging economic climate.

“These tools must be provided by employers, many of whom are not doing enough to support their staff where financial wellbeing is concerned. Indeed, while the rising cost-of-living was the greatest source of stress for 62% of Britons, a staggering 64% of employers do not have initiatives in place that are designed to improve their staff’s financial well-being, according to Mintago’s research.

“Employers must take action and engage with their employees about the financial difficulties that they are facing. By providing more targeted financial well-being support – such as educational resources, access to financial advisers or an interactive pension contribution dashboard – that suits the unique needs of each employee, businesses can alleviate a great deal of the financial stress that people are facing, ensuring staff can stay on track for a secure financial future.”

According to Federation of Small Businesses (FSB) National Chair Martin McTague, policies to help small businesses to invest and prosper seem thin on the ground.

“To address this, the Prudential Regulation Authority must cancel its plans to remove the SME supporting factor, which makes lending to small businesses less capital-intensive for banks; its loss would only make the lending situation more difficult for small businesses.

The Government tackling late payment to free up cash for small firms in supply chains would also be a huge help – the value of wrongfully withheld payments is eroded for every day that funds are not released to supply chains,” he advises.

More proactive measures

Despite the introduction and extension of loan schemes such as RLS Phase 3 last year, more improvements are necessary.

“Since the economic upheaval caused by the pandemic, we have been advocating for a government-backed loan scheme that focuses on specific sectors, bringing together both traditional and alternative lenders to secure the future of SMEs.

As the government looks for ways to revitalise the economy in 2023, the significance of implementing a permanent scheme cannot be underestimated. It could be the crucial factor that determines the survival or failure of many companies and, consequently, the overall economy,” adds Grant.

Optimistic outlook

Susannah Streeter, Head of Money and Markets, Hargreaves Lansdown believes we have, so far at least,  sidestepped a recession.

“Rather than flagging and dropping back into recession, the economy is jogging very slowly onward. The Bank has tweaked its forecast for growth, estimating it to be around 0.2% for the first half of the year. As consumers relax amid this better-than-expected health check on the economy, the latest data from the ONS indicates they are ploughing through savings and racking up borrowing, with spending on debit and credit cards jumping 11 percentage points last week.

“This more optimistic attitude risks keeping the fires of inflation smouldering. Consumer goods giants have been able to pass on price hikes to consumers and with appetite to spend staying strong, that looks set to continue. If prices stay elevated the clamour for higher wages is also less likely to quieten, increasing the risks that higher inflation will bed down.”

While things are not as bad as they were, the pound is not back to its strength pre-Brexit.

“However, although the pound has strengthened significantly since the disastrous days of the Truss administration last September, it remains very weak compared to the level it traded at before the vote for Brexit. This intensifies the inflationary headache for the Bank of England as it makes the cost of imported goods more expensive, fuelling scorching consumer prices,” adds Streeter.