Last week saw the Bank of England increase national interest rates for the second time in ten months. After months of speculation as to when the next such hike would occur, the Bank’s Monetary Policy Committee (MPC) unanimously voted to raise its base rate by 0.25% to reach 0.75% – the highest level since its post-recession lull in March 2009.
But what does this strategic move on the part of the UK’s central banking organisation mean for domestic businesses or indeed national finances? To find out, we’ve compiled insights from financial analysts, industry experts and our own expertise into the benefits, hazards and opportunities that come with escalating Bank of England interest rates…
Initial responses to the MPC’s decision have been varied. Admittedly the writing had been on the wall for some time preceding the vote – BBC News highlights in its coverage how many analysts had expected an interest rate hike as early as May, only for adverse weather conditions and “erratic” household spending causing a delay to the proceedings.
The dividing line, however, lies between those who believe that this long-anticipated rate rise offers no cause for concern and those arguing that the MPC has jumped the gun ahead of Brexit negotiations reaching their increasingly uncertain denouement. Tek Parikh, the Institute of Directors (IOD)’s senior economist, told Economia that the UK’s post-Q1 economic recovery has been “subdued” at best, meaning that the hike will merely serve to “dampen consumer and business confidence at an already fragile time”. Suren Thiru – head of economics at the British Chambers of Commerce (BCC) – echoed these fears, detecting a “concerning” trend of the Bank prioritising rate hikes over counteracting ongoing UK business issues such as skills shortages and lacklustre infrastructure investment. Indeed, despite their previously-announced intentions to continually raise their base rate until its 1% cap in 2020, BDO’s Peter Hemington implored the MPC to “act with caution” before implementing future hikes, particularly given the lingering potential for a no-deal Brexit scenario.
On the other side of the playing field, the Confederation of British Industry (CBI)’s principal economist Alpesh Paleja sought to put the Bank’s latest interest rate shift into context, emphasising that the “very slow and limited” pace of future rate hikes would limit their impact upon domestic economic stability (or lack thereof) going forward. The Bank’s own governor Mark Carney was also quick to highlight the MPC’s ability to adapt should Brexit negotiations take a turn for the unexpected as Mr. Hemington feared; “if there is a major shift [in UK-EU withdrawal discussions],” he told the Guardian, “Then that could have consequences for monetary policy. We can adjust when necessary.” Mr. Carney – as quoted by BBC News – noted, for instance, that the MPC votes on interest rates eight times a year, thereby providing them with plenty of opportunities to react accordingly should any major shifts in the UK economic landscape (Brexit-induced or otherwise) occur in the months ahead.
Potential implications for UK companies
Could business financiers take action?
In the wake of interest rate hikes such as this one, business owners would be forgiven for assuming that the funding lines available to them from traditional – and non-traditional – financiers might instantly begin to contract. And yet, contrary to popular belief, the Independent’s Ben Chu revealed last year that banks have been reluctant to raise borrowing costs in line with base rate hikes since the 2008 economic crisis, with Brexit uncertainty and “weakening consumer demand” seemingly reducing the confidence of financiers to do so without sacrificing prospective clients. We would still nevertheless recommend that any firms considering their business finance options closely monitor developing market news , since Santander announced its intention for “base-rate linked loans to UK businesses [to] move in line with the change” last week, with other mainstream financiers highly likely to follow suit soon enough.
Will the hike affect companies’ planned growth ventures?
The answer depends primarily on one key contractual variable: Annual Premium Rates (APRs). For those businesses currently utilising a secured or unsecured loan facility which relies upon a variable APR, their repayment amounts will – as the name suggests – fluctuate in parallel with the Bank of England’s interest rate shifts (alongside other quantities outlined in the financier’s paperwork). For those arrangements involving a fixed APR, however, your repayment amounts will remain consistent throughout the loan term; as such, loan-borrowing UK firms should ensure their awareness of which APR their agreement entails, since this will reveal whether there’s any immediate need to mitigate for funding slumps when planning future growth / expansion projects.
But that distinction doesn’t guarantee the safety of UK retail businesses with fixed APR loans; writing in the Mirror, Federation of Small Businesses (FSB) chairman Mike Cherry warned that “even a slight increase in consumer credit and mortgage costs” incurred by those consumers with variable loans / mortgages would have a “significant impact on the ability of shoppers, including small business owners, to spend on our struggling high streets”. It’s thus potentially in the best interests of any retail firms looking to expand, bucking industry trends of mass store closures, to consider whether hampered consumer demand would endanger their cashflow position in the process and whether they need additional financing in that case.
Bank of England interest rates hikes – weathering the tide for your firm
Of course, there are plenty of UK business funding facilities which are less affected by the Bank of England interest rates. Be sure to also use our invoice finance calculator for details of the valuable cashflow injections that your business could access and arrangement costs. If you need further consultation to decide which invoice finance product might suit your business best, get in touch today and our expert team can help find the most appropriate financier for your commercial situation.