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What does the latest BoE rate hike mean for businesses? 

Leeann Nash June 26th 2023 - 2 minute read

At its June meeting, the Bank of England (BoE) raised interest rates by 50bps, to a 15-year high of 5%, as it tries to combat stubbornly high inflation. 

The rate decision caused concern for people and businesses around the country, as it tightens financial conditions and adds to the growing cost-of-living crisis. 

But how could higher rates impact UK firms, and what can you do to prepare? 

The impacts of higher rates 

Declining demand 

Rising interest rates are likely going to put significant pressure on household budgets. The growing cost of loan repayments, including mortgages, will eat away at disposable incomes. 

Similarly, people will be far less likely to shop on credit and more likely to put money aside if they can, with higher rates making borrowing unattractive while boosting earnings from savings.  

This could hit demand for goods and services, as people tighten their purse strings. 

Higher borrowing costs 

Like consumers, businesses will also face higher borrowing costs. This means that loan repayments could become more expensive, putting further pressure on businesses. 

Existing loans and new loans could both be affected, so many firms may opt to put off investment plans to avoid further financial strain. 

Import/export costs 

Higher interest rates tend to support the relative currency. For instance, in anticipation of the BoE decision, the pound rose to a 14-month high against the US dollar and a nine-month high against the euro. 

With UK rates so high, a stronger pound could favour importers, as buying overseas goods and services become cheaper. Conversely, exporters may face headwinds as their foreign buyers’ purchasing power is reduced. 

Steps you can take 

Keep an eye on the currency market 

While higher rates have boosted the pound, worries that the BoE could hike the UK into a recession have caused volatility and trimmed GBP’s gains. 

Currency markets remain turbulent, and a seemingly small shift in an exchange rate can have huge consequences for business budgets. 

If you’re handling multiple currencies, monitor the markets and develop a risk management strategy. We can help you with both of these things, so get in touch if you need any guidance. 

Review your business plan 

A changing environment means your well-laid plans may need re-evaluating. 

For instance, with borrowing costs higher, you may choose to delay taking out a loan for investment. Short-term loans may seem like a solution, but they carry greater risks, particularly in an uncertain landscape. 

You may also want to revisit your wider business strategy. Is it agile enough to adapt to new headwinds? Do higher interest rates pose any new risks you need to address? Are there perhaps even opportunities? Now’s the time to review your resilience

Look at cutting costs rather than hiking prices 

When margins are tight, the temptation is to raise prices. But this could drive customers away, especially if they’ve seen their disposable income shrink. 

Sometimes price rises may be inevitable, but explore other cost-cutting options first. 

You could perhaps pair this with your business strategy review. Are there any places you can streamline your operation or outsource elements? Are you maximising your opportunities and being efficient? What can your company do differently? 

If you can keep costs down and provide affordable goods or services during a time of rising rates, then you’re honing your competitive edge. 

Written by
Leeann Nash

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