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The Bank of England has raised interest rates to 5% - but what does this mean for UK businesses? And is there anything they can do to minimise the financial impact on their operation?
The Bank of England’s Monetary Policy Committee (MPC) meets eight times a year (roughly every six weeks) for its nine members to discuss whether to hold the base rate or move it up or down – and by how much. The MPC considers factors such as the rate of inflation, economic growth and the UK employment rate. Each member then has a vote, with the majority determining the outcome.
For several years before the pandemic hit in March 2020, the base rate largely remained at the 0.5% mark. At the start of the pandemic, it was reduced from 0.75% to 0.1%. The Bank Rate was raised from 0.1% to 0.25% in December 2021, increased again to 0.5% in February 2022, 0.75% in March 2022, 1% in May 2022, 1.25% in June 2022, 1.75% in August 2022, 2.25% in September, 3% in November, 3.5% in December, 4% in February 2023, 4.25% in March 2023, 4.5% in May 2023, and 5 % in June 2023.
The rising base rate will make borrowing more expensive for individuals, families, and businesses who are already battling with increasing energy costs, but unfortunately it seems that the cost of living crisis isn’t going away any time soon. In fact, many experts predict that interest rates will continue rising.
Prices have risen sharply in the UK over the last 12 months. The speed of that increase is called the rate of inflation. The Bank of England uses interest rate increases as a tool to curb rising inflation. The logic behind this is that if the cost of borrowing increases, people and businesses will be less willing to take out loans for spending purposes, which would decrease demand and reduce prices.
The Bank of England website states:
“The main tool we have to influence inflation is interest rates. [Increasing interest rates] will help bring the rate of inflation down. It will take time to work. We expect the rate of inflation to reach around 8% this spring. But increasing interest rates now will help make sure inflation falls back towards our 2% target over the next couple of years. […] We may need to increase interest rates further in the coming months. But that all depends on what happens in the economy. In particular, we will be watching closely what is likely to happen to the rate of inflation in the next year or two.”
There are several factors that have contributed to rising inflation.
Firstly, after Covid restrictions eased, economies around the world opened up and people naturally started buying again, but the sellers of many of these things had problems meeting the demand. This caused prices to rise during 2021, particularly for goods that were imported from abroad.
In addition to this, there was a very steep rise in the price of oil and gas. In February 2022, the Bank of England predicted inflation would go up to 7%. Since then, Russia’s invasion of Ukraine led to further increases in the price of energy and food leaving many struggling with the cost of living.
The cost of operating is likely to increase for UK businesses due to rising energy costs, and if you have any financial agreements that are subject to variable interest rates such as loans, overdrafts, or commercial mortgages, you may find that the cost of your repayments increases.
However, if your agreements are subject to a fixed rate you won’t see any change until the end of your fixed period.
Lock in lower interest rates while you can
If you have been thinking about expanding your operation, investing in new assets, taking out a loan, or you have development projects kept on the backburner due to Covid, delaying action any longer could mean that you miss the chance to lock in lower interest rates.
It is highly likely that inflation, and therefore variable interest rates, are going to continue to increase over the coming weeks and months, but there is still time to secure finance agreements at a fixed lower rate with a broker like Bluestone Leasing.
This is because, although the Bank of England has increased their rate, lenders will take weeks or even months to adjust their rates to reflect this. Essentially, the sooner you secure your finance, the lower your interest rates are likely to be. The interest rates will be fixed until the end of your agreement and you may also be able to access tax advantages.
Consider refinancing recent purchases
Realistically operating costs are only going to increase in the coming months and cash will become even more precious to your business. Spreading the cost of your purchases over time via a finance agreement enables you to keep more cash in your business, boosting liquidity and cashflow. If you have recently purchased assets with cash, you might want to consider refinancing the assets. This will unlock the cash tied up in the assets so you can put it to better use in your business.
Bluestone Leasing can arrange a variety of bespoke finance solutions to help you manage your business’ finances over the challenging months ahead, including.
Contact our team today to explore alternative financial strategies that can minimise the impact of rising interest rates and unlock growth in the most challenging economic conditions.
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