How does the rate hike affect your business?

BoE hike interest rates: What does this mean for my business?

Thanim Islam
Thanim Islam 09 August 2022

In these times of political and economic uncertainty, it can be difficult to keep up with the market, let alone consider how changes affect your business.

Last week, the Bank of England exercised its biggest rate hike since 1995. The effects of this and rate hiking in general have serious implications for all businesses, regardless of whether or not you trade internationally. These are the effects the BoE rate hike could have on your business. 

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What is the rate hike? 

Over the last eight months, the Bank of England has steadily hiked interest rates to 1.75%, the highest since 2009, as they respond to levels of inflation not seen for 40 years.

UK/US rate hike

With the Bank forecasting that inflation will peak at 13.3% in October, expectations of further interest rate hikes remain, with an additional 1.25% worth of interest rate hikes priced in until March 2023 and peaking at 3%.

UK/US inflation

What does this mean for your business?

Cost of borrowing

With an increase in interest rates, businesses with existing loans, company credit cards, or mortgaged properties will likely find their repayments increase. These businesses will then use more of their earnings to pay off the higher interest on the loans, which in turn eats into company profits. Higher interest repayments may also deter businesses from borrowing additional funds to expand their business thus hampering the growth of a company.

Banks’ willingness to lend

A bank’s main stream of income is the interest they charge, which means higher interest rates would in theory make it more profitable for a bank to lend money. However, if the interest on a loan is higher, it also means the loans become higher risk. So, the criteria to obtain a loan or additional funding could become more stringent than it would be on a lower interest rate loan. In turn, this could also hamper the growth of a business as they could struggle to obtain additional funding.

Consumer habits and sales

In an environment with higher interest rates, consumer habits are likely to change. Higher interest rates ultimately make it more attractive to save money and less attractive for consumers to spend on credit cards. Mortgage rates increase, so those on variable interest rates will find they have lower disposable income. As a result, businesses may well find their sales drop with consumers favouring saving in the short term. Over the long term, however, those who have saved in the short term could be more likely to spend their accumulated savings once interest rates lower.

Impact on currency

In theory, a higher interest rate increases the value of the respective currency. However, as we’ve seen over the last year, the theory is not as simple as that. Markets are also attuned to the guidance given by central banks regarding future rate hikes. In general amongst G10 currencies, when one central bank hikes interest rates, others tend to follow. When looking at the effects of interest rate hikes or the guidance on future hikes on the pound, we also need to look at this impact on the pound relative to interest rate hikes and guidance on other currencies.

For example

Let’s look at the performance of pound versus the dollar over the last year versus the December 22 interest rate expectations:

Pound v dollar

Back in December 2021, the Bank of England was the first major central bank to hike interest rates. Going into February and March, we can see that interest rate hike expectations were higher in the UK than in the US, reflecting a higher GBPUSD rate. As that differential in interest rate expectations between the two currencies reduced, we can see GBPUSD started to drop. Once the US interest rate expectations exceeded the UK, we can then see the dollar grow in strength against the pound. This is a perfect example of why it’s important to take into consideration the effect of interest rate hikes not just on the pound but also on the pound relative to rate hikes in other currencies as well. 

How can Equals Money help?

At Equals Money, our in-house currency experts are here to help you. We monitor the market for you and let you know how current changes affect your payments to help you navigate volatile currency markets. 

We also offer a number of hedging solutions to help you manage risk when dealing with foreign exchange, such as market monitoring, the Equals Money Rate Watch, forward contracts, and market orders. Your own dedicated account manager will guide you through all your options so you can make the best decision for your business.

You can’t control what happens in the market - but you can control how you manage volatility and take care of your company. Equals Money is here to help you with your finances so you can spend less time worrying about rates and more time growing your business.

If you’d like to stay up to date on market news, you can sign up for our daily market report email or follow us on LinkedIn.

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