The Bank of England’s top advisors decided on an interest rate rise yesterday, despite internal dissent.
The decision was widely anticipated by economists and markets but the weakness of wage growth troubled not only the Bank’s economists but also businesses across our region.
Business Link offers readers an opportunity to share their views on the BOE’s decision.
Paul Tutin, Chairman and Managing Partner, Streets Chartered Accountants:
“The rise in rates reflects the pressures on the UK economy caused by the weakness in sterling since the Brexit vote and the causal impact of rising import costs on goods and services. Supermarkets, for example, have held off for a long time in passing on increased costs to them caused by weakening of sterling (largely due to PR pressures) but they are now passing them on, hence inflation has been rising over the last few months. Overall the UK economy has been surprisingly resilient post referendum which has allowed the bank to move now to control inflationary pressures.”
Chris Frostwick, Partner and Practice Leader of Grant Thornton’s East Midlands regional office in Leicester, says:
“This rate rise is not unexpected – there have been clear divisions in the MPC for some months. Some of the latest economic data has clearly tipped the balance. The obvious sufferers will be those with variable rate borrowings – both corporates and private individuals will obviously be affected. As one example, logistics providers might be hit hard if they have variable rate fleet finance. The harder thing to judge is the wider impact of the rate rise on corporate or personal levels of demand and the consequent effects across the wider economy”.
Simon Browning, partner in charge of the Nottingham office of global accountancy group UHY Hacker Young, says:
“I don’t believe this will have an instant major impact, as it puts us back to the same position we were in before the Brexit vote only 15 months ago. However, it could be the start of something – what lies ahead is more interesting and we could see some further rises. I think that’s when we will start to see individuals and businesses under more financial pressure amid further rate rises in an attempt to calm inflation.”
Mark Sands, Chair of insolvency trade body R3’s Personal Finance Committee, says:
“As widely predicted, the Bank of England’s Monetary Policy Committee has today decided to raise the base rate to 0.5%.
“Even a small rise to the historically low level of interest rates 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.
“The 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. 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.
“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.”
Chris Hobson, Director of Policy at East Midlands Chamber, says:
“Our preferred outcome was for a further period of monetary stability, with interest rates retained at their historic low for the near term.
“However, today’s quarter of a percentage point rise may have little effect on most companies, although some will view this as the first step in a longer policy movement, which could defer investment.
“Clearly not the time for surprises, the MPC voted as a majority of its members has been signalling. The decision will, no doubt be hailed as historic, but for industry that’s not because of the impact manufacturers might expect this one rise to have on demand conditions but what it might mean for the path of monetary policy in the next few years.
“With the UK inflation and growth outlook still subject to a high degree of uncertainty this was not a clear cut decision. The indication that the hiking cycle will be gradual and limited provides partial reassurance, but needs to be balanced with on-going clarity on how the evolution of data will determine the timing and pace of future changes.
“This decision was finely balanced and the next one should come only with the emergence of clear evidence of new domestic inflationary pressures or indeed a ramping up of downside risks to the growth and inflation outlook.”
Sam Tindale, Financial Adviser at Streets Chartered Accountants gives a word of caution:
“Savers and investors alike need to remain vigilant about what proportion of their wealth they wish to hold in cash, since cash rates still sit far below the rate of inflation, which was 3% in October. Moreover, interest rates are only expected to rise very gradually over the coming two years, implying negative real returns should inflation not fall.”
Whilst it is still early days in the world of rate rises, it certainly seems that we should expect or prepare for future increases, even if they are only at a similar rate and introduced over a long period of time. The rate rise certainly should be a catalyst to thinking about ones attitude to borrowing, investment and financial management whether you are engaged in a business, an organisation or just concerned about your own circumstances. It seems the unprecedented period of sustained low, unchanged rates of interest has come to an end.