HOLD OR HIKE? Small Firms Left Hanging as Energy Crisis Derails Rate Cut Hopes

The Bank of England is ruminating on interest rates and is expected to announce around midday that rates will stay at their current rate 3.75%

Last month there was an expectation that this time round, given inflation is creeping down slowly, rates would be cut to encourage growth. However, the Middle East crisis has changed all that. The Bank could cut rates to encourage growth. It could put them up to attempt to stop inflation heading back up, which given the huge increases in oil and gas prices we’re seeing, seems highly likely. They could hold rates and wait and see.

The European Central Bank is expected to take the same wait and see approach and Japan and Canada already have. As I type the markets have just opened and gas and oil prices have increased by 20% on wholesale markets in the UK and Europe. Volatility is the name of the game.

The Chancellor has talked a lot about stability but I’m not sure holding interest rates is the stability small and micro business owners had in mind. They were hoping that we’d be entering a stable period where little changes and they can be certain that for a few months at least they can concentrate on their businesses. The oil and gas prices have upended that. Interest rates aren’t likely to come down again as expected, fuel at the pumps is going up having a big impact on any business that needs to have materials or goods transported in or out of their premises, and even cooking up in a fish and chip shop is more expensive as is any business with energy hungry production processes. If there’s no choice but to pass on cost increases to the customers there’s little chance of seeing inflation continuing to fall.

Today’s figures also show that wages are rising at the slowest rate for 5 years at an average of 3.8% which is still above the official inflation figure of 3% but isn’t great for consumers seeing their energy bills going up. It’s not great either, for businesses hoping to attract customers with more money to spend. Unemployment seems to be the only thing that’s stable in this month’s figures staying at 5.2% with more vacancies at bigger firms offset by fewer job opportunities at small business. If interest rates don’t come down has had been expected a month ago and stay higher for longer the labour market could suffer. Bills going up could lead to more demands for wage increases but while jobs are hard to come by that’s less likely because workers have less bargaining power.

All in all it’s a more volatile picture that businesses like. Uncertainty reduces confidence and without confidence in stability and the economy there’s less chance businesses, particularly the small businesses where growth really happens, will innovate and invest. Throw in the new employee rights being phased in from 1^st of April and we’re all in wait and see mode.

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