The Bank of England may be an ‘unreliable boyfriend’ but interest rate rises are coming – what impact will this have?
After weeks of clear signals from the Bank of England, and Governor Andrew Bailey, that it would increase its official interest rate, November saw a surprise decision to keep rates at the all-time low of 0.1%. This has revived the phrase “unreliable boyfriend,” previously used to describe Bailey’s predecessor, Mark Carney, who was often accused of failing to turn tough signals on interest rate moves into action.
However, the Bank has made it very clear that rates are moving upwards to combat inflationary pressures and it is just a matter of timing, reaffirming that if economic conditions develop as anticipated, “it would be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target.”
What is behind this and what is the likely impact on businesses and the commercial finance market?
The pandemic shock has triggered a global mismatch in supply and demand for raw materials, manufactured goods and logistics. The labour market has also been severely disrupted in industries such as hospitality and transportation. This supply-demand imbalance, coupled with complex supply chains that stalled in 2020 and have struggled to bounce back quickly, has caused a resurgence of inflationary pressure.
The concern is imported inflation feeding into consumer price and wage inflation, although many believe these pressures are transient and will resolve itself as global supply bottlenecks improve. The justification for not increasing rates in November was labour market uncertainty following the end of the furlough scheme, but with early jobs data remaining positive, a December rate increase looks highly likely.
Consumers will be impacted, with the mortgage market already seeing rising interest rates with some cheap fixed-rate deals withdrawn. Undoubtedly businesses will be impacted too, by higher interest rates, higher inflation, or both.
But despite declarations of the end of the era of ‘ultra-cheap’ finance, it’s important to contextualise. The pre-pandemic rate of 0.75% was only marginally above the then all-time record low of 0.5%. The economy remains fragile and even the most ‘hawkish’ economic commentators do not expect or advocate rates going beyond this level in the next 12 months – any increases will be slow and steady.
By all historic measures, we will still be operating in a low-rate environment and whilst businesses are carrying significant debt balances, the cost of servicing this debt won’t substantially change. In highly competitive commercial finance markets, there is no imminent prospect of lenders meaningfully increasing prices.
The bigger challenge for businesses will remain what the Federation of Small Businesses has described as the “autumn storm” of rising taxes, escalating costs, staff shortages and supply disruption. Monetary policy alone cannot fix this, and businesses will rightly be worried about the Government’s increasingly hostile tone. The Bank of England may not be the only “unreliable boyfriend” this winter…