Friday, August 12, 2022

Interest rates to rise to 1.75% as recession warnings given

The Bank of England has announced that it will increase interest rates by 0.5% to 1.75% in a bid to bring inflation under control.

It is the biggest rise in interest rates for 27 years, acts as another risk to business confidence, and comes amid a forecast that the UK economy will contract for five consecutive quarters.

Scott Knowles

East Midlands Chamber (Derbyshire, Nottinghamshire, Leicestershire) Chief Executive Scott Knowles said: “The Bank of England’s bleak forecast signals a struggle ahead for businesses, their employees and customers given the precarious state of the economy, but there is hope of improvement in the medium to long term if they get the support urgently needed.

“Spiralling costs – from energy, fuel, people and raw materials – are cited by firms as by far and away the top concern right now, with 62% of East Midlands companies telling us they expect to be forced into raising their own prices in our latest Quarterly Economic Survey for Q2 2022.

“There are many causes of the current inflation crisis – global supply chain problems, trade barriers, soaring energy costs, increased taxes and labour market shortages – and this combination has caused very real crises in both the cost of living and cost of doing business.

“Interest rate rises alone will do little to address these and there is a risk it will continue to stifle investment among small businesses, which often require loans that are quickly becoming more expensive to service.

“With investment intentions among our region’s firms down – by 6% compared to the previous quarter for plant and machinery, and by 3% for training – the direction of travel by the Bank of England does not appear to offer much hope this will change.

“With the incredibly tight labour market putting upward pressure on inflation and long-term confidence beginning to wane, it’s crucial the Government now works with the private sector to come up with a solution that will enable business to drive the growth that can minimise the impact of the forecast recession.

“This should include reducing the costs for small businesses to invest in upskilling their workforce and providing training-related tax breaks, as well as reforming the shortage occupation list to allow sectors facing urgent demand for skills to get what they need.”

Alpesh Paleja

Alpesh Paleja, CBI lead economist, said: “The Bank of England’s latest rate rise is the biggest in 27 years, and follows in the footsteps of strong tightening by other central banks. It underscores the seriousness of our inflation problem, but also demonstrates the MPC’s willingness to act in response.

“Despite early signs of some pipeline price pressures fading, it’s clear that we’re in for a hard winter. With another hefty rise in Ofgem’s energy price cap looming, support for the most vulnerable households and businesses should be kept under review.

“Monetary policy is the first line of defence against inflation, yet building resilience to future price shocks requires a concrete plan for economic growth. So the new Prime Minister must prioritise boosting productivity through greater business investment via incentives and business rate reforms. Meanwhile, investing in energy efficiency can support people struggling with the cost-of-living crisis.”

Martin McTague of the FSB

Federation of Small Businesses (FSB) national chair Martin McTague said: “The need to get a grip on inflation is clear, with costs at a record high for 89% of small businesses according to FSB’s latest Small Business Index – driven by fuel, utilities, inputs, labour and tax hikes.

“Moving interest rates is not without consequences: it’s removing steam from the economy at a time of meagre growth. Small businesses already face grave uncertainty as they try to recover from the impact of Covid, while contending with the cost of doing business crisis.

“First, 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 today. 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.

“Hard-working individual business owners are also already fighting an uphill battle with supply chain disruption, increasing utility bills and surging fuel prices. Action must therefore be taken on other challenges that small businesses face.

“Many members are reporting mushrooming energy bills multiplying by four or five times in recent months. Small business energy customers don’t benefit from consumer protections, nor do they have the negotiating power of their larger counterparts, making utility bill inflation especially tricky to handle. Struggling micro-businesses should be offered help on energy costs to match that being given to households.

“The Government should also be looking at other measures to ease soaring costs of doing business, such as a reversal of the hike in National Insurance, cutting VAT and fuel duty, and introducing new reliefs on business rates.

“The cost of living crisis can’t be solved without at the same time solving the cost of doing business crisis; we must bring down inflation, but the negative aspects of today’s hike make the case stronger for small business support as thousands upon thousands of small firms will have less financial room to manoeuvre.”

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