The Bank of England has raised interest rates once again today, Thursday 11th May, in a move to combat inflation. Although March’s decrease in inflation suggests that the Bank’s efforts to tighten the economy are paying off, we must acknowledge that businesses are still grappling with high rates of inflation and interest rates, which are adversely affecting their sustainability and growth.
SMEToday asked some of the UK’s leading financial experts to comment:
Michael McGowan, Managing Director, Bibby Foreign Exchange comments “Today’s interest rate rise is little surprise. Once again, the Bank of England is following the lead of the ECB and the Federal Reserve.
Yet, despite this twelfth consecutive rate increase, UK inflation remains untamed. Businesses are facing higher borrowing and re-financing costs, and reduced capacity for growth – and their pain looks set to continue. While rates continue to rise, UK businesses could be forgiven for interpreting the MPC’s policy as ‘death by a thousand cuts’.
“The knock-on impact of this latest interest rate hike will also strengthen sterling, further compounding the challenges for businesses seeking new markets internationally. One thing exporters would do well to consider is how to best mitigate the risk of profit erosion by paying close attention to their foreign currency needs.”
Junaid Mujaver, Partner of Financial Services at consultancy Newton, comments: “The Bank of England has announced yet another interest rate hike to 4.5% in a bid to mitigate the inflationary environment.
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. Financial vulnerability covers anyone who struggles to understand conversations about money and finances, who couldn’t make financial decisions without help, who is not confident with their literacy skills, or who is barely able to make ends meet.
“Financial services providers need to step up and take note, because if vulnerable customers are struggling to understand the cost of borrowing, they are at risk of being mis-sold credit or loans – which can include mortgages, banks, car finance and student finance. With Consumer Duty fast approaching, these providers need to be proactive in ensuring their digital journeys offer full and clear explanations of what a borrowing commitment entails and are adapted to be accessible and understandable for the financially vulnerable so that no one is being under-serviced or overlooked by their provider”
Mike Randall, CEO at Simply Asset Finance, comments: “Another rise for interest rates is a stark reminder that we’re not out of the woods of high inflation yet. While March’s drop in inflation shows signs of
the Bank of England’s tightening cycle beginning to bear fruit, we cannot dismiss the fact that businesses are still faced with the highest rates of inflation and interest combined, which continue to hamper their growth.
“For small businesses, it’s yet another financial blow to face after a tough trading month of bank holidays, but studies are showing leaders remain as resilient as ever. 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.”
George Lagarias, Chief Economist at Mazars comments: “The hike was hardly news. The UK boasts thefastest wage growth and one of the tightest labour markets within developed markets. This means that inflation is becoming entrenched. 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.”