The leap to 3%, the highest interest rates have been since 2008, will mean bigger borrowing costs for businesses and mortgage holders. It’s the single largest hike since 1989, and will come as a blow to businesses that need to secure funds from banks. However, it provides a silver lining for savers that could alleviate the industry’s pain.
Martin McTague, national chair of the Federation of Small Businesses, said the latest move would heap yet more pressure on struggling firms. “Whatever the macroeconomic justifications for this latest rise, the eighth in a row, its effects will be felt immediately on the ground by small businesses carrying many kinds of debts, as well as by hard-pressed consumers,” he said.
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“Prior to today’s base rate hike, small firms were already telling us that the availability of new credit worsened in the third quarter and that finance was already getting more costly, adding to the financial pressures they face.”
Consumers will also feel the pinch in mortgage rate increases, but among around a third of households that have mortgages, 80% of those are on fixed rates and will be unaffected until their current deal expires.
Abta predicts some trading down by consumers, but stressed the market was still robust. A spokesperson said: “We know from our Holiday Habits research that despite the squeeze on finances, people greatly value their holiday and are keen to prioritise spending on holidays over other discretionary spends.
“However, holidays aren’t entirely immune, and while people will plan to go, many say they will modify what they would normally do such as opting for cheaper travel options or cutting back on areas such as eating out while away.”
One side effect of the economic situation could be a rise in early bookings to guarantee a fixed price. "We will continue to encourage people to book early to lock in prices and stress the great value offered by overseas breaks,” Abta said.
‘Everybody hurts’
There is some good news about inflation, though. Fuelled by Russia’s war on Ukraine, which has pushed up the cost of energy and other essentials, it now stands at 10%. However, the Bank of England predicts inflation will peak at 11% by the end of the year. "At the moment, we expect inflation to fall sharply from the middle of next year," said the Bank.
Explaining its reasoning for the rise in interest rates, the Bank continued: “High energy, food and other bills are hitting people hard. If high inflation continues, it will hurt everybody. Low and stable inflation helps people plan for the future. Raising interest rates is the best way we have to bring inflation down.”
Another impact of Thursday’s announcement is the effect on sterling. The pound slumped to its lowest level since the new prime minister took office on Thursday morning, reaching around $1.16 at lunchtime as investors lost confidence.
The consolation is that warnings about the pound heading for parity with the dollar, voiced during Liz Truss’s disastrous 45-day reign, are no longer likely.
Elsewhere, another positive for travel is that savers – who faced the last decade with little return for their investment – will reap benefits. This is particularly true among older people without mortgages, who will see the amount they earn in annual interest increase.
A brief look at current ISA accounts before the Bank of England announcement showed interest rates of 3 or 4% available, meaning anyone lucky enough to have a £50,000 nest egg would receive enough interest each year to buy themselves a break without eating into the amount they deposited.
A Kuoni spokesperson said: “It’s good for savers and for many of our customers saving for a honeymoon or other special occasion trip, that’s going to be positive.
“The rise in interest rates has been anticipated and it’s bound to be a concern for some customers worried about mortgage payments – so it’s going to be important to get value.”
