Jessica Fino 2 Aug 2018 04:09pm

UK business reacts to interest rates rise

The Bank of England’s (BoE) decision today to raise interest rates by 0.25% has received a mixed response from business

The British Chambers of Commerce (BCC) called the move “ill-judged against a backdrop of a sluggish economy”, while the Institute of Directors (IoD) accused the Bank of “jumping the gun”.

Suren Thiry, head of economics at the BCC, said today’s rise reinforces a “concerning aspect” of the BoE’s recent approach to monetary policy, which he believes to be “overly focused on reinforcing an idealised direction for rates, rather than on economic reality”.

“The central bank’s assumption that the economy’s speed limit has slowed is unduly pessimistic, as sustained action to fix the fundamentals at home, from closing the skills gap to greater infrastructure investment, would materially help lift the UK’s growth potential,” he added.

Meanwhile, Tej Parikh, senior economist at the IoD, said the rise threatens to “dampen consumer and business confidence at an already fragile time”.

He explained, “Growth has remained subdued, and the recent partial rebound is the least that could be expected after the lack of progress in the year’s first quarter. At present it’s unclear just how sustained any rises in pay will be, and even if we are to see strong wage growth, the impact on inflation could be limited by the need for consumers to meet borrowing costs.”

Parikh said the Monetary Policy Committee (MPC) should have held off the rise until its November meeting, allowing it to account for October’s Brexit deadlines and get a firmer grasp on the broader trend in wage increases.

Paul Haywood-Schiefer, manager at Blick Rothenberg said, “For many people who were getting no return on their capital due to long term low interest rates and decided to invest in buy to let properties this will be another blow.”

He also said the increase in the base rate will have a knock on effect on mortgages for thousands of people.

The Trades Union Congress said the increase was bad for working people and called on the government to come up with a plan to boost wages and create better quality jobs.

Peter Hemington, head of corporate finance at BDO, pointed out that, even though interest rates have been at historically low levels since the financial crash, today’s decision puts them at their highest for almost a decade.

“Uncertainty about Brexit and the increasing possibility of Britain crashing out of the EU without a transition deal is discouraging businesses from investing in the UK, with a resulting drag on productivity. For this reason, I would urge the MPC to act with caution when it comes to the possibility of any future rate rises,” he warned.

However the Confederation of British Industry (CBI) said the decision was in line with its expectations.

Alpesh Paleja, CBI principal economist, said that the MPC’s suggestion of further rises over the next few years will be “very slow and limited” as uncertainty around Brexit takes its toll on business investment.

Big Four firm PwC agreed, saying it “makes sense” both from a short-term perspective and a sustainable long-term monetary strategy.

Andrew Sentance, senior economic adviser at PwC, explained, "In the short-term, inflation remains above the 2% target and growth appears to have rebounded in the second quarter after a disappointing performance in the first three months of this year. From a longer-term perspective, this is hopefully the first step on the road to a more normal level of interest rates - following the lead from the US Federal Reserve.”

The firm expects further rises over the next two to three years, taking the official Bank Rate to around 2% or even higher.

Meanwhile, the Federation of Small Businesses (FSB) said higher rates will take some heat out of price increases, but warned that even a slight increase in consumer credit and mortgage costs is going to have a significant impact on the ability of shoppers to spend on the already struggling high streets.

Howard Archer, chief economic advisor to the EY ITEM Club, said the unanimous vote was slightly surprising as the consensus had been for a split vote of 7-2 for hiking.

“Despite the unanimous vote, the minutes of the August MPC meeting and the forecasts in the August quarterly inflation report suggest that the MPC are in no hurry to raise interest rates again. Future tightening of monetary policy will be both gradual and limited.

“Furthermore, the interest rate outlook is clearly clouded by how Brexit developments will play out over the coming months and years,” he added.