Market Turmoil: What Does The Future Have In Store For UK Businesses Amid Rising Interest Rates And Soaring Inflation?

By Neil Debenham

To say 2022 has been a tumultuous year so far would be nothing short of an understatement. The cost of living is soaring, inflation is at its highest level in 30 years and the energy price cap rose by 54% at the start of April. 

In response, the Bank of England has raised interest rates for the third time since December 2021. Hitting 0.75% - a level not seen since the global financial crisis – borrowing has become all but unattainable for UK businesses already struggling with the increased cost of debt. 

So, with inflation now set to soar to 8% by the end of June, should business leaders brace themselves for yet another interest rate rise or will we see the Bank of England's wave on interest rate rises come to an end?

With the energy crisis spiralling and Russia’s invasion of Ukraine sparking economic uncertainty, the Bank of England knows the rising cost of living must be managed in the short-term. However, it is unlikely this will come through further interest rate rises in the UK this year. 

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

Moreover, the Bank of England typically looks across the pond to the U.S. Federal Reserve for market activity. Given that the U.S. said they would raise inflation three times this year, and with both countries facing similar market conditions when it comes to the cost-of-living crisis and inflation, it stands to reason that we can expect the same here. 

However, whilst this may ease some immediate concerns, both the Bank of England and the European Central Bank have been very vocal about addressing soaring inflation rates with higher borrowing costs. In fact, financial markets projections suggest that we could see the Bank of England push its base rate to 2% next year. 

As a result, uncertainty is without a doubt the buzzword on both a macro and micro level. Many UK businesses are still trying to get back on their feet after the economic turmoil of the pandemic and relentless Brexit red tape. Any rapid moves to raise interest rates further would undermine any remaining business confidence and tighten the squeeze on consumers – resulting in a detrimental decrease in spending. 

So, how can businesses brace themselves amid the current market uncertainty and soaring inflation? 

With thousands of businesses struggling to deal with rising costs, government interventions will be crucial to resolve this imbalance and help leaders whether the storm, for example, through providing additional consumer protections to SMEs. However, the decisions that business leaders take now could also determine whether they sink or swim.

Whilst businesses alone cannot change the market landscape, they can take immediate measures to give themselves the best chance of surviving through and beyond these challenging times. Streamlining operations as much as possible will be crucial to try and build an economic buffer – for example, this could include re-assessing immediate expansion plans, reducing staffing costs and re-evaluating any non-essential business expenses. 

Ultimately, consumer and business confidence are at an all time low and any moves to raise interest rates further could risk an economic recession amid fragile market conditions, which is the last thing anyone wants.

Put simply, the Bank of England cannot be left to address the soaring cost of living and sky-high inflation through interest rates alone. If inflation keeps rising, a collective response from the government is warranted that includes monetary policy. Careful planning is needed – the coming months are anything but predictable. 

Neil is an entrepreneur, investor and business troubleshooter who has facilitated over £50 million worth of private equity and debt investment into scaling UK businesses. He is also the CEO of Fintrex, a specialist business advisory and corporate consultancy for SME's, Private Equity and Corporate Lending businesses.