Could a 4% Bank Rate be the next blow for small firms?

              

 

This is an abbreviated article by Liz Barclay – read the full article at Business111.com/news

Interest rates didn’t rise this month, but Britain’s small businesses shouldn’t assume they’ve escaped. Three members of the Bank of England’s nine-person Monetary Policy Committee already want Bank Rate increased from 3.75% to 4%, inflation has climbed to 3.1%, and the Bank now expects it to move above 4% early next year. Even Governor Andrew Bailey says rates may have to rise if high energy prices persist. For small businesses already battling higher wages, energy, fuel and borrowing costs, the question is no longer whether rate rises are conceivable. It’s whether their finances could withstand one if it happens.

THE BANK IS GETTING NERVOUS

The Bank of England voted 6–3 in September to keep Bank Rate at 3.75%.

Megan Greene, Catherine Mann and Huw Pill wanted an immediate quarter-point rise to 4%.

That’s significant because only two members voted for a rise in June. More importantly, some of those still voting to hold are becoming increasingly concerned about inflation.

Governor Andrew Bailey says that if the Middle East conflict persists and the risk of higher prices becoming embedded increases, monetary policy may have to tighten.

Clare Lombardelli says the case for raising rates is building the longer the conflict continues, while Dave Ramsden says further inflation pressure could create a case for an increase.

That’s not a prediction that rates will rise.

But it’s a warning small businesses shouldn’t ignore.

ENERGY IS THE WILD CARD

Inflation rose from 2.9% in July to 3.1% in August, with transport and particularly motor fuels making the biggest upward contribution.

The Bank now expects inflation to reach around 3¾% in the final quarter of this year and slightly above 4% in early 2027.

Much depends on energy.

Oil, gas and refined-product prices have risen as the Middle East conflict has continued. If those increases persist, the danger is that businesses pass higher costs into prices and employees seek higher wages to compensate.

That’s when the Bank could become more inclined to act.

WHAT WOULD HIGHER RATES MEAN?

For small businesses with debt, the most obvious effect is borrowing costs.

Variable-rate loans can become more expensive, overdraft costs can increase and refinancing becomes more difficult.

Microbusinesses using short-term finance to bridge gaps in cashflow can be particularly exposed.

But there’s another problem.

Their customers borrow too.

Higher mortgage and consumer-credit costs leave households with less disposable income. That can mean fewer meals out, postponed home improvements and less spending in shops and on personal services.

Small businesses can therefore be squeezed twice: their own finance costs rise while customers spend less.

INVESTMENT CAN WAIT

Higher borrowing costs can also make investment harder to justify.

The new van, machine, shop refurbishment or expansion that looked viable at one interest rate may not make sense at another.

Small firms postpone investment, recruitment and expansion.

And that’s where an interest-rate decision intended to control inflation can become another obstacle to economic growth.

PLAN FOR BOTH OUTCOMES

A rate rise isn’t guaranteed.

The Bank itself says there has so far been little evidence that higher energy costs are generating significant second-round effects in prices and wages.

The labour market remains relatively soft and financial conditions are already restrictive.

Small businesses therefore need to prepare for both possibilities.

Look at variable-rate borrowing and calculate what another quarter or half percentage point would actually cost.

Protect cashflow, reduce expensive debt where possible and be cautious about taking on borrowing that only works financially if rates remain unchanged.

But don’t automatically stop investing.

If rates stay at 3.75% and inflationary pressure begins to ease, businesses that have abandoned viable investment unnecessarily could miss opportunities.

THE NEXT DECISION MATTERS

The Bank of England’s next interest-rate decision is due on 5 November.

Nobody knows yet what it will decide.

But the direction of travel inside the MPC has changed.

Three members already want rates at 4%, while several of those voting to hold are openly warning that persistent energy inflation could eventually force them to reconsider.

For small and micro businesses, that’s enough reason to prepare.

Don’t try to predict the Bank of England.

Work out whether your business could cope if it surprises you.

This is an abbreviated article by Liz Barclay – read the full article at Business111.com/news

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