What do Increases in Interest Rates Mean for Business?

Interest rates have risen sharply as the Bank of England continues to use its powers to tackle soaring prices.

At its November meeting, the Bank increased its benchmark rate from 2.25% to 3%.

That is the eighth consecutive hike since December 2021, pushing the rate to its highest level for 14 years. It also marks the biggest single increase since 1989, and could have a big impact on the cost of living and people’s finances.

What does this mean?

Ben Westoby, Senior Client Manager & Consultant at Forbes Burton explains: “By increasing interest rates, the central banks are attempting to dampen people’s spending habits by encouraging them to save more and by making things like mortgage and loan repayments more expensive.

“This of course will have a direct impact on businesses in general. There’s a lot to be said for consumer confidence and this kind of practice certainly puts a certain amount of pressure on businesses that have already had a particularly hard time due to the global pandemic, recession and the aftermath of the conflict that is ongoing in Ukraine and Eastern Europe.

“Suppressing demand in this way helps to reduce the cost of goods and services, and we are currently seeing sharp rises in interest rates to help combat the very high rates of inflation the UK currently face

“The central bank has acted to restore a sense of calm by estimating that the bank’s base interest rate will peak at around 4.5% by autumn 2023.

“To add further complications, interest rate rises only really help to combat inflation that is driven by people’s excessive demand for goods and services.

“However, a significant reason behind the UK’s current high inflation is the rising cost of energy due to war, and despite a slowdown in people’s spending habits, this is unlikely to have a real impact.

“The government has already stepped in by helping to fund people’s energy bills and may need to extend the help if the measures do not affect the inflation figures fast enough.

“They may also look to generate higher tax revenues from energy suppliers and distribute them back to consumers to ease the burden. However, in the long run, energy security and ownership of production will be the goal to ensure secure, predictable, and cost-effective supply.

“Individuals and businesses can protect their finances by looking to see if they can get better deals on any loans or mortgages they may have, to make use of attractive saving products and look for greener, more efficient ways of living and business practices.

“For businesses in particular, there’s many things they can do right away to improve their situations and futureproof themselves against any unexpected bumps in the road. Cash flow forecasting, paying off debt that is stopping them from growing and reviewing not only their business plan overall, but looking at every penny that goes into and out of their business might reveal ways to become more lean and efficient and to really make a difference to their bottom line.”

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