UK Interest rate highest level in 13 years:
Interest rates are now at their highest in 13 years, and inflation is at a 40 year high. This means that things are getting more expensive for SME owners. The increase in the cost of borrowing will have a direct impact on the cost of running your business.
In this piece, we’ll take a look at what this means for UK SMEs as well as providing insight from Economist, Trevor Williams.
Context to the rise in interest rates:
From war in Ukraine, to Brexit, to the aftermath of the Covid19 pandemic, there’s a range of reasons as to why the interest rate and inflation keep rising. All 3 of these causes have also set in motion a knock on effect regarding fuel and energy costs which are further squeezing the UK population for every penny. Unfortunately SMEs are also facing this crisis head on, with less help from the UK government to alleviate the burden.
The UK interest rate is now at 1.25% but it may soon be rising again. The Bank of England is attempting to stem the pace of the soaring prices as a result of the above factors. The rate of 1.25% is the highest level in 13 years and the fifth consecutive rise.
Inflation (the rate prices rise) is at a 40 year high of 9% and the BoE have already warned that this could surpass 11% later in 2022.
Energy prices are expected to drive living costs even higher in October so businesses and the average working person are likely to be squeezed even further. It is also still uncertain just how high interest rates will go.
Bank of England Warns of Deteriorated Economic Outlook:
The UK’s economic outlook has deteriorated according to the Bank of England. Prices are rising quickly across the globe; especially energy, fuel and food costs. The BoE has noted how UK banks are in a position to weather this economic downturn. The BoE made these comments in its latest Financial Stability Report.
The IMF and OECD have said Britain is more susceptible to recession and high inflation than other Western countries, all who are dealing with energy and market shocks also.
You can read more generally about the effects of UK inflation here.
What high interest rates mean for UK SMEs?
Higher interest rates affect the cost of borrowing; the value of loans decrease which means lenders set higher interest rates because money has shrunk in value.
This can see businesses restricted from some growth strategies like investing in new equipment or hiring new employees. Disposable income is also reduced because repayments on loans increase. Consumer spending being limited also has a knock on effect for small business revenue.
As interest rates can be thought of as a tax on borrowing, small businesses can be disproportionately affected because they rely more heavily on funding. In these situations, cash flow can be reduced which gives a company less disposable income and bigger overheads.
Trevor Williams, Chief Economist, stated:
“The current challenge facing SMEs is yet another they have endured since the Global Financial Crisis of 2008, the Pandemic in 2020 and now the impact of the war in Ukraine, but they still thrive.
For instance, many are locked into very low-interest rate loans when they were at their lowest in the 328-year history of the UK bank rate. Moreover, even with the current and expected rate rises, the UK bank rate will still be well below its long-run average.
A sliver of good news is that SMEs are not facing the full burden of interest payments. The reason is that inflation will ease the burden of paying back debt, as interest rates adjusted for inflation have become more negative, so borrowers pay less to lenders. Another is that SMEs have been repaying debt for many few years to strengthen their balance sheet, so they are in a better position to face this crisis than appears on the surface. Finally, plenty of liquidity is available, so long-term rates are still low historically, allowing scope for refinancing problematic loans. Circumstances are challenging, but SMEs are well-placed to overcome the crisis.”