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Economics

Interest rates: how the rise might affect your business

What will be the impact for businesses of the cost-of-living crunch?

According to the Financial Times, markets now expect the BoE to lift interest rates to at least 1% by May, and 1.5% by November – a level that was not expected to be reached until March next year.

Energy regulator Ofgem has also announced that the energy price cap, which restricts how much suppliers can charge in Great Britain, will increase from 1 April. The record rise in global gas prices means the cap will increase by £693. 

The combination of rising inflation, relatively weak wage growth, higher taxes, rising interest rates and energy bills is being described as a perfect storm for many. The government has responded with a package of support for struggling households.

Commenting on the impact of the rate hike, Bank of England governor Andrew Bailey said: “It is a hard message but if we don’t take this action it will be worse.”

Ross Walker, NatWest Markets’ Chief UK Economist, said: “The policy guidance is for Bank Rate rises to be delivered more quickly rather than to a materially higher end point over the long term.”

There is still time for you to assess how they might affect your business now and in the future.

Areas for consideration

Revisit your business plan

Are your objectives flexible enough to withstand the current headwinds? Take a good look at your existing business strategy and whether it still applies. Assess the type and levels of your debt.

Businesses should be prepared for every eventuality and aware of the risks of overextension when borrowing in an environment conducive to rising rates. With an increase in interest rates, businesses with company credit cards and existing loans can have higher interest payments, less disposable income and bigger overheads. In some cases, the business may end up paying off the interest only, rather than the loan itself.

The policy guidance is for Bank Rate rises to be delivered more quickly rather than to a materially higher end point over the long term

Ross Walker, Chief UK Economist, NatWest Markets

Increased interest rates could also mean businesses opting for shorter-term loans tied to cash flow and presenting greater risks, potentially leading to further negative impacts.

You can discuss with your bank whether your available capital is enough to sustain you.

Value of the pound

⁠Higher interest rates can increase the value of currency. If businesses have income streams in foreign currencies, then rising interest rates, and in turn rising sterling, will affect a company’s profits.

Forward contracts can be used to mitigate the risk of exchange-rate differences where your business has foreign currency transactions.

Keep an eye on your supply chain

⁠If prices increase, or payment terms and accounts payable change, companies need to be aware that while they might be relatively insulated, their key partners, ie their customers and their suppliers, might not. 

Even if your company has no funding affected by interest rate changes, your suppliers may do, and your prices may increase as they cover increased interest charges. Having contracts in place to fix supply prices can mitigate this risk.

Nevertheless, interest rate increases force companies’ hands, with inflation driving up the pricing of manufacturing, distribution, and business services, which then trickles down the business supply chain.

This material is published by NatWest Group plc (“NatWest Group”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest Group and NatWest Group makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the NatWest Group Economics Department, as of this date and are subject to change without notice.

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