Interest rates increase to 1.75%
In the first half a per cent increase in interest rates for over 20 years, the Bank of England has raised the base rate to 1.75%
This is the fifth rise since last December and the Bank argues that it is needed to tackle soaring inflation, stoked by a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs. They voted eight to one in favour of hiking interest rates by 0.5%.
CPI inflation is expected to rise more than forecast by the Bank in May, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target in 2024.
In a very gloomy outlook for the economy, the Bank said: ‘The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe.
‘The UK is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.’
When the country emerges from recession in 2024, the Bank expects growth to remain close to zero throughout the following year.
David Goebel, associate director of investment strategy at Evelyn Partners, said: ‘The inflation report and economic estimates paint a more difficult period ahead for the UK economy than the MPC had previously anticipated.
‘The 50bps increase shows the Bank of England catching up with larger interest rate moves from other central banks, particularly the Federal Reserve.
‘However, policymakers are balancing this with concerns over weakness in the economy – demand in the UK labour market is easing, and energy prices are set to rise by as much as 70% in the autumn, when Ofgem’s next price cap comes into play. Softening consumer confidence points to weaker spending in the second half of this year, so declining growth could go some way to curtailing high levels of inflation in itself.’
Rising rates will leave thousands of small businesses with less financial room to manoeuvre, warned the Federation of Small Businesses (FSB).
FSB national chair, Martin McTague, said: ‘Many commercial, personal and professional loans that small businesses and sole traders hold are not protected by fixed rates and will move in line with the increase. In a situation where inflation is already putting many small firms in extremely difficult conditions, there is now further concern that these businesses will face higher costs in paying back their loans.
‘Second, attempts to get back to a functioning commercial lending market will be hampered as new products will become more expensive – and so small firms will find it harder to access affordable credit. The British Business Bank’s Recovery Loan Scheme is coming back later this month, and this could not happen soon enough. If the economy slows in autumn, it will be even more important for the scheme to be operational and in place, so it can be flexed up.’
Story by Sara White from Accountancy Daily