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Bank of England interest rate increase – what does this mean for the economy?

Posted on: 08/08/2018

The Bank of England raised interest rates last week from 0.50% to 0.75% - the highest level it’s been since March 2009.

The Bank’s Monetary Policy Committee (MPC) based the decision of making this increase on expectations of a strengthening economy, solid employment levels, more consumer spending and the potential for wages to rise.

This is good news for those saving across Britain, but how will the wider economy be affected?

As there is already a widespread lack of confidence across businesses in the UK due to significant political and economic uncertainty, some experts have raised concerns as to whether the hike in base rate will add to this reduced optimism. If confidence remains low, there will be fewer businesses investing in their futures, preventing growth across the wider economy.  Businesses will also feel the effects of reduced consumer spending as individuals, and businesses alike, will tighten the purse strings during this fragile period.  

Recent findings from the Federation of Small Business (FSB) confirm that one in three small businesses find new credit is unaffordable, therefore creating barriers for these firms in achieving growth.  The increase in interest rates is only likely to add to this barrier and make access to finance even more unattractive. 

FSB National Chairman, Mike Cherry, commented:   “A lot of small firms will have been preparing for higher interest rates. However, with borrowing costs for small firms already high, it’s critical that any future rate rises are carefully considered and gradual.

“A good proportion of small businesses will welcome the prospect of higher rates taking some heat out of price increases. Consumer inflation has been consistently above 2% for months now with input costs, especially fuel, also on the rise.

“This inflationary pressure has proved a challenge for small firms, not least retailers who are already up against high employment costs and spiralling business rates.

“One big concern is the impact of rising rates on consumer demand. For the first time in 30 years, we have an environment where household outgoings are bigger than household incomes.

“Even a slight increase in consumer credit and mortgage costs is going to have a significant impact on the ability of shoppers, including small business owners, to spend on our struggling high streets.

“We need to see a fundamental shift in the UK’s small business finance culture. Too many firms are reluctant to borrow and realise their full growth potential. Those that do are too reliant on traditional debt products.”

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