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interest rates, small business

Are we at peak interest rates?

Kirsty McGregor Oct 05, 2023

What’s been happening with interest rates?

After 14 consecutive interest rate rises since December 2021, in September 2023 the Bank of England (BoE) decided to pause their policy of rising rates and they chose to leave rates unchanged that month at 5.25%.  

This came as a surprise to some who thought that they may increase them again, but this time their committee voted to hold rates, although this was a very close vote

With the voting so close, there is no certainty that rates have peaked and members of the monetary policy committee may change their mind at the Bank of England base rate next review in November and vote for another increase.  

This is all dependent upon the other economic statistics they receive, most importantly inflation. 


What is the link between interest rates & inflation?

There are various different measures of inflation but a common one is the Consumer Prices Index, or CPI.  Prices of a representative collection of goods and services are compared each month.  Any change in them, compared with 12 months ago, is reported as the inflation figure.  The current list of goods and services reviewed, or the ‘basket’, contains 743 different items. 

The Bank of England is targeted by the Government to use their own powers, known as monetary policy, to keep inflation at 2%.  Its view is that if interest rates are higher, consumers won’t spend as much on credit cards, mortgages and buying goods or services.  If demand reduces, then the prices of these goods may come down. 

CPI reached 9.6% in October 2022 and has only reduced to 6.7% by September 2023.  However, this was actually a lower figure than the BoE expected, so this is why they didn’t use their powers to keep increasing rates.  They are balancing the harm that high interest rates can do to businesses and consumers, with the need to reduce inflation. 

High interest rates also usually means that the pound is worth more compared to other currencies, because investors will want to buy sterling and receive the higher interest rates. 

An increased demand for those pounds pushes the value up and means that it is cheaper to import goods from abroad. As we import a lot of goods from around the world, it has the effect of eventually lowering the average costs of goods to consumers across the whole country.  

In January, the Government also committed politically to half inflation by December 2023, which would make it around 5.4%.  The government can use taxes and spending, or fiscal policy, to try to affect inflation as well. 

This is why they have been reluctant to give pay rises to public sector workers and the industrial action has continued for many months.  The Chancellor says he has to balance the books and stop inflation increasing again.  His concern is that if consumers have more wages, they could potentially keep spending and that could fuel inflation for longer.  


What are the factors driving inflation?

There are many factors and most have been working against the economy for the past couple of years. 

  • The cost of energy and wages have been critical as both have been increasing and these affect many sectors.  
  • Food continues to rise, even though the speed of that increase is slowing down. This in turn affects supermarkets and hospitality businesses, and then consumers.  
  • The cost of building materials has also escalated considerably, mainly due to supply chain disruptions, and that directly affects construction costs.  

No matter which sector you are in, as a business owner you will undoubtedly have felt these effects in terms of higher material costs, bigger utility bills and higher staffing costs.

Are rates likely to increase further?

Economists are predicting that rates may rise again slightly but they are unlikely to fall until the second half of 2024. 

The NIESR forecast predict that CPI inflation will fall to 5.2% by the end of 2023 and be 2-4% by the first quarter of 2025.  

However, economists have been wrong before and with inflation numbers being rather unpredictable in recent months, it is difficult to say what the impact on rates will be. 

Having an accurate cash flow forecast is a necessity for most businesses as few have the luxury of excess cash.  Therefore considering a short to medium term fixed rate for any lending would provide that certainty over the next couple of years. 


Effect on commercial mortgages or fixed term lending rates

If you’re coming off a fixed deal and do not fix a new facility, you may see your cash flows increase as the variable rate will probably be a lot higher than the rate you were paying on a fixed term deal.  

Your available cash runway may shorten dramatically and this may have an impact on other plans you had. 

If you are considering locking in a rate now mindful of future uncertainty, get an idea of your options using our funding calculator.


Effect on business borrowing

While some experts have read the recent BoE base rate pause as a sign that we’re at peak inflation, there is definitely still a long road ahead. 

While some lenders have reduced rates on business borrowing a little following the recent BoE rates review, there’s likely to not be much effect on business borrowing in the near term.

If you think you might need finance for capital or operational expenditure, tax bills or as a safety net, the best first step is checking your eligibility to get an indicative idea of how much you could borrow to compare. Get started with our funding calculator.

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