Interest rates rise to 0.5%. What could this mean for your business?

Latest figures show inflation running at a worrying 5.4% as of December 2021. This is the highest level in more than ten years, prompting the Bank of England to raise the interest rate to 0.5%.

But what does this mean for your business?

The bank rate up until now

For a long time, the bank rate stood at 0.75% having previously bobbed about somewhere near the 0.5% mark. But at the start of the pandemic in March 2020 it was slashed to just 0.1%, before being increased again to 0.25% in December 2021. The new bank rate of 0.5% was then announced in February 2022.

Governor Andrew Bailey told a news conference: "We have not raised rates today because the economy is roaring away.

"An increase in Bank rate is necessary because it is unlikely that inflation will return to target without it."

When reminded of the huge financial squeeze this will bring for many people and businesses, Mr Bailey said: "It is a hard message but if we don't take this action it will be worse."

Why has the bank interest rate increased?

The Bank of England uses interest rate rises as a way to control inflation. The idea is that if lending becomes more expensive, fewer businesses - and people - will want to take out loans to spend. In turn, theoretically at least, demand is then suppressed and prices go down.

The 5.4% inflation rate reported in December is a hefty increase on the 4.2% of October 2021. It’s also more than double the 2% target set by Boris Johnson’s government. Further increases are expected throughout 2022 and 2023, not least due to extremely high energy prices.

So what does the interest rate hike mean for businesses?

This is where the news gets a little grim. Whilst some businesses will be affected more than others, it’s important to arm yourself with the facts.

Mortgage payments on property may increase

If the business owns mortgaged property which is subject to the lender’s standard variable rate, then it will follow the Bank of England base rate pretty closely. So now that base rate has risen, so too will monthly mortgage payments. In the aftermath of Covid-19, this is the last thing many businesses need.

Although the rate has risen it’s still relatively low, which means now could be a good time to shop around for a fixed rate mortgage deal. Businesses may also be in a strong position to negotiate with lenders for a better rate.

Consumer habits are likely to change

Consumer behaviour is also affected by increases (or decreases) in interest rates.

Low interest rates mean people aren’t achieving much return on their savings. Borrowing is also cheaper, so in both cases people are more likely to spend. This of course is good for business.

However, increasing the interest rates mean lending will be harder to come by and more expensive. As inflation then starts to increase, the money in people’s pockets won’t go as far and the public will tighten their belts. Businesses feel this through reduced revenue as spending power dwindles.

When interest rates rise, businesses will need to get innovative to keep the cash rolling in. They may need to change their marketing to attract more affluent consumers, or switch to cheaper suppliers potentially from abroad.

Obtaining funding for the business may get trickier

As we’ve just touched on, when interest rates rise banks are less comfortable to lend. Yes it’s more profitable for them to do so, but only if the business or individual they’re lending to actually pays it back in full. The risk is, of course, that they won’t.

The knock-on effect is that lending becomes tighter, and there are much more stringent affordably checks on those taking credit or loans out. With this in mind, it’s probably worth bringing your business plans forward if possible, and applying for any additional funding sooner rather than later.

Credit is more expensive

Many businesses have a commercial credit card and/or a business overdraft facility. Like mortgages, rate rises will mean that these lines of credit become more expensive to service. Once rates do eventually go down, they’re also generally slower to follow suit. In other words, once they become expensive, they tend to stay that way for some time.

Businesses that are in their overdraft or making minimum credit card payments may start to struggle. Any further rises could even push them over the edge.

The pound strengthens

Whether the pound going up in value is good or bad depends on the nature of your business. But it’s important to understand how an increase in interest rates affects the value of sterling.

Essentially, an increase in rates tends to boost the value of the pound. This is because - in ‘normal’ times at least - such an increase shows a level of confidence in the currency. In turn, demand goes up which again pushes the value of the pound up more and so on.

Businesses that import or export goods abroad are the ones most affected by value changes in the UK currency. If the business typically imports, a stronger pound is good news because products can be bought more cheaply. However, exporting businesses will find their goods start to cost more in other countries, potentially bringing about a decrease in demand.

If this is something your business will be affected by, it’s worth focussing on domestic sales wherever possible. This should hopefully help to mitigate the fall in demand from your foreign markets.

Ready to see if your company could be due thousands in R&D Tax Credits?

More good news is that innovative UK companies can also claim up to 33% of their eligible research and development costs back. This makes R&D Tax Credits a massive leg up in these tough economic times.

Having successfully applied for the relief, the award is administered either as a reduction in the company’s Corporation Tax or as a lump sum payment.

So if your company has developed or improved a product, service or process recently that’s involved technical or scientific research, see if you can make an R&D Tax Credits claim.

Feel free to also call our team on 0207 118 6045 or send us a message.