Tuesday, June 28, 2022

‘Huge unease’ among businesses as rising interest rates hamper investment prospects

The Bank of England has announced that interest rates will rise from 1% to 1.25%, as it tries to get a handle on soaring inflation, which is currently at a 40-year high of 9%, and could surpass 11% later this year, according to the Bank.

The Bank said rising energy prices were expected to drive living costs even higher in October, but added it would “act forcefully” if necessary should inflation pressures persist.

David Bharier, head of research at the British Chambers of Commerce (BCC), said: “While expected, the decision to raise the interest rate will add further concern to businesses amid a weakened economic outlook, soaring cost pressures, and labour shortages.

“The increase signals the Bank’s intention to tackle inflation but businesses have been raising the alarm about spiralling prices since the start of 2021 and a higher interest rate is unlikely to address many of the global causes of this.

“The increase could impact smaller businesses who may be reliant on banking or overdraft facilities, for instance, those buying goods in bulk in an attempt to offset raw material shortages.”

East Midlands Chamber Chief Executive Scott Knowles said: “Many businesses will have been expecting yet another hike to interest rates to combat spiralling inflationary pressures, but this doesn’t detract from the huge unease they will be feeling about the direction of travel, as the Bank of England appears to be overseeing a prolonged period of aggressive monetary tightening.

“Against a backdrop of continued domestic and global headwinds that are causing a very real cost of doing business crisis – which we can see is now seriously affecting the economy with output falling by 0.3% in April – we should be backing firms to invest in order to make the productivity gains that will drive the growth we desperately need.

“By hiking interest rates, businesses face another barrier to spending as the price of debt accelerates. Our latest Quarterly Economic Survey for Q2 2022 showed that investment intentions in plant and machinery among East Midlands firms fell by 6% compared to the previous quarter.

“At the same time, intentions for investing in training – something of major importance during a time when four in five businesses attempting to recruit are struggling to find the skills they need – dropped by 3%.

“Declining business investment is a serious cause for concern and urgent Government action is needed to halt this fall. Cutting VAT on companies’ energy bills to 5% would ease the squeeze on their cashflow and give some room for manoeuvre.”

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