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Market turmoil: What does the future hold for UK businesses amid rising interest rates and runaway inflation?

By Neil Debenham

To say that 2022 has been a tumultuous year so far would be an understatement. The cost of living is soaring, inflation is at its highest level in 30 years and the ceiling on energy prices rose by 54% in early April.

In response, the Bank of England raised interest rates for the third time since December 2021. Reaching 0.75% – a level not seen since the global financial crisis – borrowing has become virtually inaccessible for UK businesses already grappling with the rising cost of debt. .

So, with inflation now expected to climb to 8% by the end of June, should business leaders brace themselves for another interest rate hike or will we see the end of the wave of rising interest rates? Bank of England interest rate?

With the spiraling energy crisis and Russia’s invasion of Ukraine creating economic uncertainty, the Bank of England knows that the rising cost of living must be managed in the short term. However, this is unlikely to translate into further interest rate hikes in the UK this year.

Raising the interest rate has consequences. Theoretically, a rise should reduce inflation by curbing consumer spending. However, given the current market uncertainty, it is difficult to assume that a modest rise will have an immediate or prolonged impact on the economy. Given that the 0.75% mark has not been breached for over 9 years, it would be an important step for the Bank of England to take further action now.

Additionally, the Bank of England generally looks across the pond to the US Federal Reserve for market activity. Given that the US has said it will raise inflation three times this year, and both countries are facing similar market conditions when it comes to the cost of living crisis and inflation, of course we can expect the same here.

However, while this may ease some immediate concerns, the Bank of England and the European Central Bank have been very active in dealing with soaring inflation rates with higher borrowing costs. In fact, financial market projections suggest that we could see the Bank of England push its key rate to 2% next year.

Therefore, uncertainty is undoubtedly the buzzword, both at the macro level and at the micro level. Many UK businesses are still trying to get back on their feet after the economic turbulence of the pandemic and the relentless Brexit bureaucracy. Any quick move to raise interest rates further would undermine remaining business confidence and tighten pressure on consumers, leading to a damaging drop in spending.

So how can companies prepare for the current market uncertainty and soaring inflation?

With thousands of businesses struggling to cope with rising costs, government interventions will be crucial in addressing this imbalance and helping leaders in the event of a storm, for example, by providing additional consumer protections for SMEs. However, the decisions business leaders make today could also determine whether they sink or swim.

While businesses alone cannot change the market landscape, they can take immediate action to give themselves the best chance of surviving through and beyond these difficult times. Streamlining operations as much as possible will be crucial in trying to create an economic buffer – for example, this could include reassessing immediate expansion plans, cutting staff costs and reassessing non-essential business expenses.

Ultimately, consumer and business confidence is at rock bottom and any move to raise interest rates further could lead to an economic recession in fragile market conditions, which is the last thing anyone wants. wish.

Simply put, the Bank of England cannot be left to deal with soaring costs of living and skyrocketing inflation on interest rates alone. If inflation continues to rise, a collective government response is warranted, including monetary policy. Careful planning is required – the months ahead are anything but predictable.

Neil is an entrepreneur, investor and business troubleshooter who has facilitated over £50m of private equity and debt investments in UK business development. He is also the CEO of Fintrex, a business advisory and business advisory specialist for SMEs, private equity and corporate credit businesses.