Businesses urged not to panic after interest rates rise

Businesses have been urged not to panic after the Bank of England’s decision to raise interest rates for the first time in a decade.

The Bank’s Monetary Policy Committee opted to raise the rate by 0.25% to 0.5%.

Rain Newton-Smith, CBI Chief Economist, said the decision had come as no surprise, given the recent signals from the Bank and several MPC members on implementing a rise should the economy expand.

Growth figures for the third quarter showed the UK economy expanded by 0.4% compared with the April to June period – slightly more than expected and effectively signalling an end to the decade-long low rate.

However, Ms Newton-Smith put the decision into perspective by saying: “While it’s the first rate rise in over a decade, it is only taking the rate back to the level seen in August 2016 and at 0.5% it remains near rock bottom.

“Businesses will be watching the reaction of consumers closely and what’s important is the pace of any future rises. As rates creep up, it’ll be important to keep an eye on the impact for those at the lower end of the income scale.”

In Greater Birmingham, business leaders said the Government must not lose sight of the need to rebalance the UK economy.

Paul Faulkner, chief executive of Greater Birmingham Chambers of Commerce, said the increase should not detract from the need to strengthen the foundations of the economy.

He said: “A number of commentators have noted how the Federal Reserve took a similar approach at the tail end of last year which saw a strengthening in US economic output and hope the trend will be reflected in the UK –this remains to be seen given the stagnant wage growth the UK has suffered over recent years.

“Nevertheless, we shouldn’t lose sight of the fact that at 0.25%, the rise is incremental and largely symbolic in its application as the MPC looks to curb rising inflationary pressures.

“(This) should not detract from the real issue – the need to shore up the foundations of the domestic economy.”

He said this month’s budget offered the Government the perfect stage for mapping out its plan on how it intends to move away from a reliance on consumer spending to fuel growth, investing in infrastructure and upskilling workers.

“Not only will this help rebalance the national economy but (will) also ensure our businesses have the platform required to thrive,” he added.

Louise Bennett, chief executive of the Coventry and Warwickshire Chamber of Commerce, was another to be pragmatic.

She said: “This rise is restoring rates to their pre-Brexit levels which, at the time, was a record low any way.

“So, we don’t believe companies across our patch will be dramatically concerned by this individual rise as it has been widely predicted. We feel it is still slightly early when you look at the economic performance over the past 12 months.

“The real concern is where interest rates might go and how quickly. There is still huge uncertainty around Brexit, and economic growth is some way short of where we want it to be.”

R3 Midlands chairman Chris Radford, a partner at Gateley in Birmingham, said even a small rise could cause problems for many borrowers.

“Vulnerability to a financial shock like an interest rate rise is widespread; many people just don’t have much financial headroom left, following a long period of stagnating wages and growing levels of household debt. On the business side, our research has picked up thousands of businesses who would be unable to adjust to even a small interest rate rise,” he said.

Latest statistics showed an increase in the number of people becoming insolvent in the third quarter of this year, continuing an overall upward trend since mid-2015, he added.

“With interest rates having hovered near rock bottom for nearly a decade, many borrowers are deeply unprepared for any rise in the cost of personal credit – many will never even have experienced a rate rise. This is especially acute as use of credit can often be the only way people can afford to pay for a place to live, a car to get to work in, or even the basics, like food or energy bills,” he said.

“Our concern is that many people now take soft credit terms and low interest rates for granted, to an extent, whether or not they realise it, and should the current conditions change, they will find themselves exposed.”

Elsewhere, Ian Cass, Chief Executive of the Forum of Private Business (FPB), said: “While the small increase may not impact businesses hugely, it will make them think again about their spending commitments. At a time when the business community is already being cautious, this rise may lead many to hang onto their cash to ease difficult cash flow issues.

“Additionally, late payment issues will have a greater impact than previously and they will think even harder before lending money to invest in growth.”