Blogs Higher Interest Rates: The Effects on Businesses

Higher Interest Rates: The Effects on Businesses

Bank of England

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30th June 2022

Dexter Lawrence Written by Dexter Lawrence

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 The Bank of England's Monetary Policy Committee already increased the rate by 0.25% to 1% at its meeting on 4th May. Now business owners are preparing for increasing overheads if the interest rates rise again - especially during this time of economic downturn, both in Britain and globally.

What's the purpose of the Bank of England interest rate?

The Bank of England interest rate, also known as the Bank Rate, is the UK's most important interest rate. To keep inflation low and stable; the MPC reviews and sets it regularly to meet the government target.

The Bank Rate determines the interest rate the Bank of England pays to commercial banks that hold money with it. This, in turn, influences the rates these banks charge to people borrowing money, or the interest paid on savings.

When the Bank of England interest rate changes, banks normally change their interest rates on borrowing and saving to reflect this.

How much have interest rates fluctuated recently?

Interest rates had previously been at a series of historic lows: 0.5% following the 2008 financial crisis, later falling to 0.25% and then just 0.1% during the coronavirus pandemic. This was the lowest rate ever in the Bank of England’s history, going back more than 300 years.

Unfortunately, there's no way of knowing exactly when the Bank of England will choose to change interest rates. Similarly, it's impossible to estimate how much they will rise. However, according to media reports, borrowers and savers alike are starting to plan for a potential rise in the foreseeable future.

The decision to raise interest rates on 4th May was an attempt to cool inflation. Following Russia's invasion of Ukraine in February 2022, global inflation pressure has intensified sharply, leading to a deterioration in UK and world growth.

As a result of additional supply chain disruption and escalating Covid-19 developments in China; the outlook has deteriorated further.

How does the interest rate affect businesses?

When the interest rates rise, it makes borrowing money more expensive for businesses. This creates more problems for companies, especially those who already have cashflow problems.

Whether the borrowing is on credit cards, or it’s a business loan; the interest rate can have a significant impact on businesses that have borrowed cash. When the Bank of England interest rate increases, you could end up paying more for your loan. This increases overheads and puts extra pressure on cashflow.

A business experiencing cashflow problems is likely to find it more difficult to attract investors.
Suppliers might increase their costs to help cover the rising interest, impacting profit margins. Consequently, you might find your business is unable to offer the usual high standards of services or products, which will affect your relationship with customers.

How can you protect your business?

You could mitigate the risks by increasing your prices or entering into negotiations with each supplier to try to fix rates. However, any price increase may have a negative impact on your relationship with customers - who will already be cash-strapped themselves.

You may be able to negotiate with your bank to fix your loan's interest rate - perhaps switching to a fixed rate deal for a period. However, many businesses choose to seek advice from a professional accountant during these challenging times.

While you might view this as extra expenditure that you can ill afford, investing in professional advice could save you money in the longer term.