The Bank of England’s base rate is a critical lever in the UK’s economic armoury.
Set by the nation’s central bank, it influences the interest rates set by high street banks and other lenders.
With the Monetary Policy Committee reviewing this rate eight times a year, this base rate acts as a key response tool to the UK’s economic fluctuations.
A Snapshot of the Current Base Rate
As of 22 June 2023, the Bank of England base rate stands at 5%, marking an increase of 0.5 percentage points for its 13th consecutive hike.
This surge echoes a similar high last seen in 2008, while the next rate review is scheduled for 3 August 2023.
While the Bank of England grapples with soaring inflation, there is an inherent risk of the economy hitting the brakes if interest rates skyrocket too swiftly.
With predictions hinting at a potential fall in rates only in early 2024, the stark reality is that the climbing inflation continues to outpace interest rates, eating into the real value of cash savings.
The Ripple Effect of Interest Rates on Businesses
Interest rates serve as a barometer for borrowing costs and potential savings – crucial considerations for businesses.
With borrowing often forming the financial backbone of many businesses, a rise in interest rates translates into costlier small business loans from banks and traditional financiers.
Additionally, interest rate fluctuations can drive consumer behaviour, with higher rates typically encouraging savings over expenditure – a vital mechanism to rein in inflation.
Reacting to the Bank of England decision to raise the base rate to 5%, the British Chambers of Commerce (BCC) Head of Research, David Bharier, said:
“With CPI inflation stubbornly higher than forecast at 8.7%, it was expected that the Bank would increase the interest rate further.
“But, while inflation is still the top concern for businesses, interest rate rises are now causing worry for a rapidly growing number of firms with soaring borrowing costs. Businesses will need clarity on the direction of further changes.
“There are several drivers of inflation which could be eased by a policy response. For instance, unprecedented tightness in the labour market is causing firms to bid up salaries, and trade barriers with the EU are driving up costs.
“The BCC has been urging the Government to act on these issues for over a year and is ready to work in partnership with it to ease labour shortages and reduce trade barriers.
“High inflation, high interest rates and slow growth will be a lethal combination for many. Fundamentally, solutions need to be found beyond the interest rate lever.”
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