Will We See a Hike in the UK Interest Rate Soon?

After more than seven years fixed at 0.5% following the Great Recession, the base interest rate in the UK reached an historic low of 0.25% in August last year. The Bank of England (BoE) took the decision to slash the rate in the wake of the Brexit vote and the devaluation of the pound, which according to Oanda sunk to its lowest level in 31-years immediately after the referendum result was announced.
 
While the base rate has been maintained indefinitely since, most pundits expect that the rate will be increased before the end of the year. Timing remains a key concern, of course, with continued uncertainty surrounding Brexit and the narrow trading range of the pound meaning that the BoE is unlikely to hike the rate during their upcoming policy meeting this week.
 
What Course Will the Interest Rate Take in 2017?
 
The policy meeting, which will take place on March 16th, will see the Bank’s Monetary Policy Committee (MPC) convene and discuss the short-term outlook for interest rates in the UK. This is likely to be a tense and challenging meeting, particularly as the UK economy continues to tread the fine line that exists between spiralling inflation and artificially low interest rates. In fact, a number of MPC members are known to be uncomfortable with incrementally rising rates of inflation, which are creating a greater chasm between the cost of living and real wages growth in the UK
 
The rate of inflation increased to 1.8% in January this year, while the cost of groceries also continues to grow rapidly as we approach the second financial quarter of 2017.
 
Despite this discomfort, however, the BoE remains fairly tolerant on the subject on inflation growth, especially with the Prime Minister Theresa May claiming that she remains on course to trigger Article 50 before the end of March. Until decisive action has been taken to confirm the UK’s intent to leave the European Union and commence exit negotiations, the Bank will hold fire on hiking interest rates or implementing similar policy changes. The landscape will shift quickly once Article 50 has been enacted, however, as this will trigger further devaluation of the pound, drive disproportionate inflation growth and force the BoE to increase the base interest rate.
 
How Will The Base Interest Rate (and Subsequent Changes) Impact on Businesses?
With this in mind, it is anticipated that the BoE will have little choice but to increase the base interest rate some time after Article 50 has been triggered. We may even see two, incremental rate hikes before the end of 2017, with some experts forecasting an increase to 0.75% before the year is out.
Although this has yet to be confirmed, the real question that remains is how a shifting base interest rate will impact on businesses? For now, of course, it can be argued that a minimal interest rate has at least reduced the cost of commercial borrowing, making it easier for companies to source competitively priced credit. The reduced cost of borrowing also creates potentially higher profit margins, while offering brands the opportunity to restructure their price polices in order to become more competitive.
 
Once interest rates begin to increase during the second or third financial quarters, however, the outlook of both brands and consumers will change considerably. A higher base rate will go some way to negating the devaluation of the pound, which in turn will help to control inflation and ensure that basic cost of living does not spiral out of control. It is also important to note that high interest rates can have a negative impact on big ticket purchases and items, however, as consumers can quickly become deterred from buying and reinvesting into the economy.
This can catch some businesses cold, so commercial ventures must adopt an agile business model that can be adapted as the economic climate continues to shift.
The Last Word: Why the BoE Must Balance Inflation and the Base Interest Rate-setters
Ultimately, the complex nature of macroeconomics means that it is hard to determine precisely how rising interest rates will impact on businesses in 2017. Much will depend on the nature of the increase and the ability of the BoE to manage rising inflation and devaluation with the base interest,  while business-owners themselves must also adopt a proactive approach and tailor their strategies as the landscape shifts.
 

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