How Could the Recent Interest Rate Increase Affect UK Businesses?

In early August, the Bank of England revealed it had raised interest rates for only the second time in the last 10 years. As this BBC article explains, the ‘rate has risen by a quarter of a percentage point, from 0.5% to 0.75% - the highest level since March 2009’ and subsequently we expect there to be further knock-on effects for UK businesses.

Here we take a closer look at this and speculate on what it could mean for firms of varying sizes across the UK.

A Change in Borrowing Habits

Historically, after rate rises we have seen borrowing habits of businesses being affected, often this takes the form of a reluctance to take out additional loans. This is understandable though, as the higher interest rates will ultimately mean that the more a company borrows, the more they will have to pay back in the long run. This repayment is of course something that can affect future profit margins.

Another potential reality for businesses is that they have to shop around for business loans that better suit their financial situation and no longer exclusively look to banks or big lenders.

Revised Business Planning

The plans and strategies UK businesses may have in place may now need to be revised in line with the changes to interest rates. What they may have previously targeted or forecasted might now no longer be as achievable as everything from production and operations to staffing can become more expensive. Equally, as with borrowing habits, the investment habits of business owners may well change too, as the potential returns on these investments may not be as realistic as they previously were.

Market Slowdown

It’s not just directly businesses who may feel the effects of a higher interest rate though, consumers can also be affected – which then feeds into the success of these companies. Buyers may no longer be able to afford the same amount of products or services they once did and the respective businesses they choose may then see profits fall as a result of this.

Changes to Mortgages and Rental Agreements

Just like in the domestic markets, the businesses that are currently paying a mortgage on a property or number of properties on a variable rate, will have to pay more as the cost of this increases with overall interest rates. The same could apply for those who are nearing the end of rental agreements on their business’ premises, as the landlords or property owners may look to increase their rent prices in line with interest rates on their new agreements.

Final Thoughts

What we can surmise from the above is that overall interest rate rises will lead to it being a more challenging time for UK businesses. Most of the aspects of their operations will become more expensive and will impact on their business models, a positive to this though is that it will at least give business owners a chance to streamline their firms and rebuild as and when the rates fall.