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Interest rate rise will have little impact on inflation and increased borrowing will seriously impact struggling businesses

An Interest rate rise of 0.15% to 0.25% by the Bank of England is a brave and surprising move given the current economic uncertainty following the resurgence of Coronavirus.

Blick Rothenberg Partner Richard Churchill said: “The main drivers of the current surge in inflation are the worldwide shortage of goods and increased transport costs due to Brexit and shortages in the labour market. These factors are having a much greater impact on inflation and the UK economy.

“What is needed is clear direction and action by UK Government to actively address these matters. If this is carried out, UK businesses will feel they can absorb the interest rate increase, with inflation starting to fall, and future interest rate rises becoming less likely.

“If there is no assistance or direction by the Government then business owners will be reluctant to take on further borrowings which are now more expensive to sustain their businesses through the current economic uncertainty. This will result in an increase in business failures and a large cost to the Government as the many previous support measures provided to these businesses will not be repaid.

“While the economic impact of the increase on UK business is likely to be minimal (with interest rates still exceptionally low at 0.25%) the message it sends to business owners is a stark one that further interest rate rises are likely, and debt will be more expensive.

“Many businesses have survived to this point with the assistance of cheap borrowing. If the cost of borrowing increases for those businesses facing further economic uncertainty through Coronavirus, particularly those in the Hospitality and Leisure sectors, then escaping the current financial gloom may appear impossible.

“The Bank of England obviously felt compelled to act with inflation now over 5%, but many of the factors influencing inflation are macro-economic and it is unlikely that the interest rate rise in the UK will have any impact on inflation without further increases in the future.

Would you like to know more?

If you would like to discuss the above or how it may affect you and your business, please get in touch with your usual Blick Rothenberg contact.

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