Business groups looking for decisive Budget after latest rate rise

The UK’s business groups have united in demanding decisive action in the Spring Budget following the Bank of England’s (BoE) latest increase to the base rate. While the groups all recognise that inflation must be brought under control they are now warning of the ‘serious side-effects’ of a hard-line approach.

 

Tenth consecutive increase

The BoE raised interest rates for the tenth consecutive time on 2 February, with a half point increase taking the base rate from 3.5% to 4%.

The decision was taken after the Monetary Policy Committee (MPC) voted by a majority of seven to two to increase the base rate by 0.5%. The MPC said it is confident that inflation has peaked and its approach is the right route to get it back under the 2% target.

The BoE forecasted for the base rate to rise to around 4.5% in mid-2023 before falling to just over 3.25% in three years' time.

 

Resisting the urge

Chancellor Jeremy Hunt welcomed the central bank’s interest rate decision. He also gave a hint of what could be expected in the Spring Budget as he reiterated his determination not to cut taxes on 15 March.

Mr Hunt said:

Inflation is a stealth tax that is the biggest threat to living standards in a generation, so we support the Bank's action today so we succeed in halving inflation this year.

We will play our part by making sure government decisions are in lockstep with the Bank's approach, including by resisting the urge right now to fund additional spending or tax cuts through borrowing, which will only add fuel to the inflation fire and prolong the pain for everyone.

 

No end to peak interest rates

However, the Confederation of British Industry (CBI) said that it was ‘still too soon to call an end to peak interest rates’.

The CBI noted that although inflation is coming down thanks to lower energy prices, labour market shortages and broader inflationary pressures mean higher rates are still needed to bring inflation back to the 2% target.

Anna Leach, Deputy Chief Economist at the CBI, said: 

Rising interest rates, high inflation and tightening fiscal policy will challenge economic growth this year. The government needs to act decisively in the forthcoming Budget to reinforce the UK’s position as a global centre for innovation and the low carbon economy.

 

Serious side-effects

The British Chambers of Commerce (BCC) called the BoE’s approach ‘hard-line’ and warned of ‘serious side-effects’.

It said those impacted most by the decision will be mortgage holders and businesses reliant on debt to keep afloat after three years of ‘economic shocks’.

The BCC’s own research shows that while inflation remains by far the top concern for businesses with 80% citing this in Q4 2022, concern about interest rates has risen sharply with 43% now citing this.

David Bharier, Head of Research at the British Chambers of Commerce (BCC), said:

With the Bank expecting inflation to slow to around 4% by the end of the year, further rate rises could now simply add to the risk of a deeper recession, outweighing the benefits.

The main driver of inflation for most firms is energy costs, but this requires a clear policy solution, with immediate relief for those most affected and longer-term structural changes to ensure this market failure does not occur again.

Businesses will also need to see concrete action in the upcoming Budget to promote growth, including plans on infrastructure, tax, skills, and trade.

 

Hoping against hope

Small businesses also reflect the BCC’s concern that high interest rates come with ‘consequences’ that worry them almost as much as inflationary pressures.

Martin McTague, National Chair at the Federation of Small Businesses (FSB), said:

Small businesses are hoping against hope that today’s rise in the base rate will signal a turning point in the Bank of England’s battle to bring inflation under control.

Small business cost increases have run considerably above the headline rate, and these must be brought down. That said, the higher rates announced today come with consequences.

The FSB said that over half of small firms rate the availability and affordability of new credit as poor, which is especially worrying at a time when cash reserves are running dry for many. This structural financial vulnerability is feeding through to insolvency numbers, the FSB added.

McTague said:

The Budget in six weeks’ time must be grasped as an opportunity for the government to promote a growth agenda. From tackling late payment, addressing skills and labour shortages, reversing cuts to R&D tax credits, and lifting more small firms out of paying business rates, we think there is much that could and should be done. Small businesses are the economic grassroots and – if left to wither – the whole economy will suffer.

 

Spring Budget

The Chancellor will deliver the Spring Budget, alongside a forecast from the independent Office for Budget Responsibility (OBR), on 15 March. 

Mercia’s tax experts will be watching and will provide detailed analysis of the day’s announcements. Keep your clients up to date with our non-branded, digital products.