Interest rates raised: SME reaction

Surprise Bank of England move raises cost of borrowing for UK business

Our experts

We are a team of writers, experimenters and researchers providing you with the best advice with zero bias or partiality.
Written and reviewed by:
Helena Young
Direct to your inbox Email Newsletter viewed on a phone

Sign up to the Startups Weekly Newsletter

Stay informed on the top business stories with’s weekly email newsletter


The Bank of England (BoE) today announced interest rates will rise from 0.1% to 0.25%, following surging inflation over the past few months.

The decision has taken economists by surprise. It comes at a time of uncertainty, with the Omicron variant lowering consumer confidence and introducing a wave of cancellations for leisure, travel and hospitality businesses during the usually busy festive trading period.

While many had been expecting a rate rise, the general consensus amongst analysts was that the Monetary Policy Committee (MPC) would wait to see what impact Omicron has on the economy before taking action.

Government data showed inflation hit 5.1% in November amid soaring energy prices and global supply-chain issues.

Giles Coghlan, chief analyst at trading firm HYCM, said the decision had come as a surprise to many traders, who hadn’t been expecting a raise in rates until February.

Coghlan said: “Today’s hawkish move from the central bank has caught the markets off guard, with EURGBP down sharply on the release.

“Overwhelmingly, economists had been predicting an increase, but Omicron fears and the triggering of ‘Plan B’ have clearly not been enough to keep the BoE on the side-lines.

“Today’s decision will have been a careful balancing act for the Monetary Policy Committee, who will have been weighing a surge in inflation against a surge of new coronavirus cases – and clearly, inflation won the day.

“Understandably, too, given that forecasts are predicting that CPI inflation will hit 6% next April, when the cap on energy bills is lifted.”

What does the new rate mean for SMEs?

This is the first time the BoE has raised rates since the start of the pandemic, when the Bank introduced measures in response to Covid-19. To encourage borrowing, interest rates were cut in two stages to 0.1% – the lowest they have ever been.

In general, higher interest rates increase the cost of borrowing. As the value of loans decrease, lenders need higher interest rates as the money they are paid back shrinks in value.

This means that small businesses with company credit cards and existing loans will be forced to spend more on interest payments.

While the new level is still low by historic standards, the BoE will likely be forced to raise the rate even higher in the next few months if the inflation continues to rise.

How are SMEs reacting?

At a time when many small businesses are still struggling to repay loans taken out as a result of the pandemic, the new rate will not be good news to those who were hoping for further government support.

Following the announcement, many SMEs expressed disappointment.

Dr Jackie Mulligan, founder of social enterprise, said the raise was ill-timed, and would hurt consumer confidence. Mulligan said: “If there was a recipe for how to create a perfect storm to hurt our high streets and small businesses, this would be it.

“Inflation, rising interest rates and Omicron, all on the back of nearly two years of pandemic-induced turbulence.

“Now more than ever it’s important people try to shop locally, as spending locally will support local jobs. In the absence of government support, it’s down to us all to support our local businesses and help them to weather the storm.”

Others though, acknowledged the impact that high inflation is having on the economy and welcomed the change as a minimal increase that should be manageable for most small firms.

Keisha Shah is founder of Teddo Play, a children’s educational brand. 

Shah said: “Inflation is bad for business so why shouldn’t the Bank of England confront it head on? As things become more expensive, people spend less and this affects the economy more than a small interest rate rise.

“Raising interest rates will stabilise inflation and help the economy. This is something that the Bank of England should have done months ago.

“With inflation under control, goods are sold at a fair price and the economy runs better. This was the right decision.”

Find out more about how rising interest rates would affect your small business in our full guide.

Written by:
Helena Young
Helena is Lead Writer at Startups. As resident people and premises expert, she's an authority on topics such as business energy, office and coworking spaces, and project management software. With a background in PR and marketing, Helena also manages the Startups 100 Index and is passionate about giving early-stage startups a platform to boost their brands. From interviewing Wetherspoon's boss Tim Martin to spotting data-led working from home trends, her insight has been featured by major trade publications including the ICAEW, and news outlets like the BBC, ITV News, Daily Express, and HuffPost UK.

Leave a comment

Leave a reply

We value your comments but kindly requests all posts are on topic, constructive and respectful. Please review our commenting policy.

Back to Top