Rising borrowing costs 'could prove final straw for struggling firms'
The rising costs of borrowing as businesses look to deal with the impact of surging inflation could prove to be the final straw for many, a leading accountant has warned.
Although the economic impact on companies of last week’s interest rate increase is likely to be minimal, the upward trend spells trouble ahead, predicted Richard Churchill, a partner at tax and advisory firm Blick Rothenberg.
“Although interest rates are still exceptionally low at 0.25 per cent, the message it sends to business-owners is a stark one that further interest rate rises are likely, and debt will be more expensive,” Mr Churchill said.
He pointed out that 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,” he added.
Mr Churchill said many factors influencing inflation are macro-economic, and he believes it is unlikely that the interest rate rise in the UK will have any impact on inflation without further increases in the future.
He also said it was clear that the main drivers of the current surge in inflation are the worldwide shortage of goods, 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, businesses will feel they can absorb the interest rate increase, inflation will start to fall, and future interest rate rises will become less likely.”
Last week’s rise from 0.1 per cent marks the first rates increase since August 2018 and just the third since the financial crisis.
Members of the monetary policy committee voted eight to one to raise rates after pressure has been building on the Bank of England to bring the soaring cost of living under control.
In the minutes of the decision, the Bank warned that inflation could now peak at 6 per cent in April, while it also downgraded its growth outlook to 0.6 per cent in the fourth quarter from a previous forecast of 1 per cent.
It said: "Most members of the committee judged that an immediate, small increase in bank rate was warranted. The decision at this meeting was finely balanced because of the uncertainty around Covid developments.
"There was some value in waiting for further information on the degree to which Omicron was likely to escape the protection of current vaccines and on the initial economic effects of this new wave. There was, however, also a strong case for tightening monetary policy now, given the strength of current underlying inflationary pressures and in order to maintain price stability in the medium term."
Analysts at the Centre for Economics and Business Research said there was little sign of the price pressures that prompted the decision subsiding and it expects the key drivers of inflation, notably difficulties in global supply chains, to continue into the New Year with multiple rate hikes expected in 2022.
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