What does the interest rate rise mean for British business?

It may be long overdue, but for some firms it couldn't come at a worse time.

by Rebecca Burn-Callander
Last Updated: 02 Nov 2017

The Bank of England raised interest rates today for the first time in over a decade. The rise may be marginal, from 0.25% to 0.5%, but the move has prompted a mixed reaction from the nation's business community.

The Federation of Small Businesses (FSB), the trade body that represents the views of more than 160,000 private firms, warned that the rise – though small – could not have come at a worse time

'Today’s rate rise will mean yet more cost pressures for small firms as they battle spiralling prices and flagging consumer demand,' said Mike Cherry, national chairman of the organisation.

Could this widen the funding gap?

Small firms are already failing to take advantage of external finance, which is hampering their growth potential, Mr Cherry argued.

'We have a chronic issue with permanent non-borrowers in the small business community,' he said. 'Today’s rate increase could heighten the sense that borrowing is too expensive if you’re a small firm. 

'That would threaten investment, growth and job creation. Just one out of 10 UK firms applies for funding at present, according to official statistics.

The response from lobbying organisation CBI, which represents the interests of larger businesses, was more sanguine. 'While it’s the first rate rise in over a decade, it is only taking the rate back to the level seen in August 2016 and at 0.5% it remains near rock bottom,' said chief economist Rain Newton-Smith. However, she added that business leaders will be watching consumer reaction closely in case this spooks the man on the street. 

Last month brought us a slump in consumer confidence and a dip in retail sales, and the rates rise could make consumers more reluctant to open their wallets. This would be bad news so close to Christmas, with many retailers banking on bumper festive revenues.

The long tail of a rates rise

Following the announcement, Sterling took a tumble, falling by more than a cent against both the euro and the dollar. (Usually, a rate rise would push sterling up as it encourages people to hold pounds in British banks, but this time it was expected and therefore already priced in.) This has the potential to hurt British exporters, who have been experiencing healthier order books as a result of the cheaper pound. 

'The main impact of a hike is a likely reduction in confidence for consumers and firms already rattled by ongoing Brexit uncertainties and an erosion of growth that is already tepid,' commented Phil McHugh, a senior analyst at forex firm Currencies Direct. 'Some have argued the economy is still too fragile to cope with increased borrowing costs.'

Newer start-ups are also likely to be caught on the hop by the rates rise, having never experienced one before. Graham Toy, chief executive of the National Association of Commercial Finance Brokers (NACFB), explained: 'Some of the more insightful SMEs may well have factored an interest rate hike into their financial plans but with interest rates having been so low for so long, many SMEs will have just assumed the benign cost of borrowing will continue.'

Mortgage payments may rise for many homeowners following today’s announcement and the FSB warns that this could have a knock-on effect on Britain’s businesses too. 

'You need to consider the fact that, for a typical micro business owner, personal and business finance are closely interlinked,' says Mr Cherry. 'If mortgage and car leasing payments start to rise that’s less money to play with when it comes to expanding the business and taking on new people.'

The impact of this rise may be limited in the short-term. But if Mark Carney pushes through further rises over the coming months, it could be a long, gruelling winter for Britain's small firms. 

Photo by George Rex/Flickr

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