How a 5% interest rate hike will affect trading

It was announced yesterday (22 June) by the Bank of England that interest rates will immediately increase from 4.5% to 5.%, marking the 13th consecutive hike since rates were first increased in December 2021 from a low of 0.1% to 0.25%. 

So far in 2023, this is the fifth consecutive interest rate hike and has thus followed the same pattern as in 2022, which saw eight base rate jumps. 

As a result, the current rate of 5% is the highest seen in over 15 years since April 2008 when the base rate rested at the same figure. 

Many are rightfully concerned about what this will mean for mortgages up and down the country, as many will not be able to keep up with the increased rates applied to their current monthly payments. Jeremy Hunt has announced help for homeowners after the announcement, such as more flexibility for borrowers without a negative affect to their credit score. 

However, so far nothing has been decided for SMEs, and according to Ballards Business Recovery, one of the most significant effects of high interest rates on businesses is that it becomes harder to borrow money because high interest rates make loans more expensive. 

An increase in the interest rate attached to a loan makes it harder to pay off debts quickly, as well as making it more difficult to take out new short-term loans to cover unexpected expenses or to expand a business. Higher borrowing costs can also erode margins, as well as prohibiting growth, which further adds to a vicious cycle of stagnation and loss of profits.

Philip King, cash flow expert at business banking platform Tide, says: “The rise in interest rates is painful news for small businesses. Already suffering from increased energy costs, higher priced supplies and wage inflation, the last thing business owners need is higher funding costs and a squeeze on available funding.  

“Higher interest rates will lead to more businesses and individuals being unable to service their debts leading to greater numbers of insolvencies. The month-on-month increases of 51.2% in corporate insolvencies, and 10.7% in personal insolvencies reported for May don’t bode well. Many of the individuals will be sole traders so insolvency will mean the end of a business, as well as a personal financial crisis.”

George Lagarias, chief economist at Mazars, concludes: “The UK is in a vicious inflation cycle, plain and simple. Unless demand is decisively curtailed, there’s a real danger that inflation will get out of hand. Make no mistake, this means significant pain for consumers. 

“The government could step up to alleviate pressures in the labour market and increase housing availability, which should help diffuse the inflation bomb faster. Presently, markets are discounting four more rate hikes, a 1% higher rate by the end of the year.”