Fears of further damage to consumer confidence as interest rates hiked

The Bank of England raised interest rates to their highest since 2009 on Thursday, hiking by a quarter-point to 1 per cent to counter inflation now heading above 10 per cent, even as it sent a warning that Britain risks falling into recession.

Business groups expressed concern about Thursday’s move.

“The decision to raise interest rates will cause considerable alarm among households and businesses given the rapidly deteriorating economic outlook and mounting cost pressures,” said Suren Thiru, head of economics at the British Chambers of Commerce.

The British Independent Retailers Association (Bira) has said the development is “inevitable yet not surprising”.

“Since last summer we have been warning of double digit supply chain inflation that would result in higher prices. However, retailers are doing all they can to limit the price increases as they recognise that the shoppers have less money to spend,” Andrew Goodacre, Bira chief executive, said.

“Whilst we hope this latest increase reduces inflation, we worry that it will further damage consumer confidence and reduce expenditure. Furthermore, we are concerned about the rising cost of debt payments as a result in interest rate rises as many more independent retailers have increased levels of debt due to Covid.

He urged the government to review the options for paying back the bounce back loans and offer more flexibility to the businesses dealing with ‘a tsunami of cost increases’,

The Federation of Small Businesses (FSB) has made similar calls, adding that the move will add pressure to many small firms already struggling to handle spiralling inflation.

“Those with coronavirus business interruption loans will be feeling particularly apprehensive after today’s increase, which is why we’re urging government to extend Pay As You Grow options to CBILS customers to ease at least one of the mounting pressures they face,” FSB chair Martin McTague said.

“We’re also encouraging policymakers to look again at our debt for employee equity proposals, giving the minority who are really struggling to repay bounce-backs the option to convert to an employee ownership trust model – protecting livelihoods, improving productivity and protecting taxpayer funds in the process.”

The BoE’s nine rate-setters voted 6-3 for the rise from 0.75 per cent, with Catherine Mann, Jonathan Haskel and Michael Saunders calling for a bigger increase, to 1.25 per cent, to stamp out the risk of the inflation surge getting embedded in the economy.

The BoE said it was also worried about the impact of China’s pandemic lockdown policies, which threaten to hit supply chains again and add to inflation pressures.

The BoE’s move represented its fourth consecutive rate hike since December – the fastest increase in borrowing costs in 25 years – and it hardened its message about further increases, despite its worries about a sharp economic slowdown.

The BoE said most policymakers believed “some degree of further tightening in monetary policy may still be appropriate in the coming months”.

It dropped the word “modest” to describe the scale of rate hikes ahead.

British consumer price inflation hit a 30-year high of 7 per cent in March, more than triple the BoE’s 2 per cent target, and the central bank revised up its forecasts for price growth to show it peaking above 10 per cent in the last three months of this year.

Real post-tax household disposable income – a measure of living standards – is forecast to fall 1.75 per cent this year, the biggest calendar-year drop since 2011 and the second-biggest since the BoE’s records began in the 1960s.