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How Does the August 2018 Interest Rate Hike Affect Businesses?

Mar 08, 2018 Red Flag Alert Updated On: August 14, 2023
Interest Rate Increase | Effect on Business

The Bank of England’s interest rate increase from 0.5% to 0.75% demonstrates that the nine-member monetary policy committee feels the economy is robust enough to sustain the rise. The Bank is working towards their pre-planned 2% target and is confident that businesses can absorb the increases. 

While the effect on borrowing is relatively minimal – those who have borrowed capital at variable rates will feel a small hike (£25 per month on a £200,000 loan) – the bigger risk may be around consumer confidence. 

Rumblings of discontent 

It’s fair to say business groups don’t agree with the rise. Suren Thiru, Head of Economics at the British Chamber of Commerce called the decision “ill-judged” and “unnecessarily risks the UK’s growth prospects” while the Institute of Directors feels the Bank has “jumped the gun”. 

Ostensibly the rise is aimed at controlling inflation with the Governor of the Bank of England, Mark Carney, confirming that a key driver for the rise is to “make sure inflation is going to return sustainably to target”. Arguably, the inflation Carney is looking to curb may be driven by a Brexit-induced increase in the cost of imports and a weakening pound – rather than simply a strong economy that can weather the interest rate increase. 

On balance, it’s a relatively modest step towards a preconceived target, and not everyone agrees with it. Thiru feels the rise “focuses on an idealised direction” rather than “economic reality”. 

Will consumers run for the hills? 

The 0.25% increase was expected and will have a modest effect on the cost of borrowing, but will it have the impact on consumer confidence that some fear? 

There are problems in the economy: the UK’s high street is being decimated by online alternatives, business rates have risen sharply for some, economic growth is slowing, spending is debt-fuelled for the first time since the 1980s, and there is a looming ‘hard’ Brexit. It’s fair to say the business climate has its challenges. With more increases likely, businesses will need to prepare. 

If people stop spending and save more, some businesses will be hit with reduced revenues and increased costs. How consumers react will be interesting: if a sustainable level of spending and economic growth continues then businesses shouldn’t feel much impact, but if increases to mortgages, and the cost of debt, lead to more people saving because they feel nervous about the future, businesses will likely suffer. 

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React now 

In military parlance, you want to be ‘left of the bang’. In other words, be aware of the situation and put steps in place to reduce your risk. No one knows what will happen to the economy; there are some unique and unprecedented risks on the horizon, so regardless of this interest rate increase you need to be prepared. 

At Red Flag Alert we’re experts at helping you manage risk. Our software provides data on every business in the UK, providing a real-time view of their financial health. You can monitor every one of your customers, and our unique flag system means that you can see when problems begin and take appropriate action. In any climate this is a vital tool, but given the unique pressures the UK is facing (interest rates included) there has never been a better time to increase your vigilance. 

For a free consultation on the financial health of your customers and how you can monitor this effectively, try us out for yourself, and book a free trial today. 

Published by Red Flag Alert March 8, 2018

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