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Interest rate increases – what does it mean for individuals and businesses?

Last week, The Bank of England voted to increase UK interest rates for the first time in more than a decade. Interest rates were adjusted from 0.25 per cent to 0.5 per cent in a bid to keep a lid on inflation. Although the announcement itself didn’t come as a shock, it was significant in my house as it marked the first time interest rates had risen since I got my mortgage. So what is the potential impact on borrowing costs for individuals and businesses?

The majority of individual borrowers will be protected from any immediate effects of the increase because they have a fixed-rate mortgage. It will however come as a blow to millions of mortgage borrowers on variable rate deals.

There is some good news here for the country’s 45 million savers who have seen their nest eggs flounder because of inflation and negligible returns. It is also positive news for anyone considering buying an annuity for their pension, who will also see better deals.

For businesses, the rate increase obviously means that banks will be charging more for their business loans, which in turn means they must use more of their earnings to pay that interest, which decreases profits. Firms in the tourism and manufacturing sector in the UK have benefited from a weak pound. A rate rise could affect output in these sectors.

Some business owners may decide not to start new projects or expansions during periods of high interest rates. This hampers the growth of the company. The key here is that rates rise at a pace that small firms can handle.

The outlook for further rises is more of a worry for all borrowers, as according to Bank of England governor Mark Carney, they are likely to rise twice more over the next three years, with many economists predicting as many as three rate increases over the next two years.

Awareness is critical – any firm that has set up in the last decade has, like me with my mortgage, only known rock bottom rates. UK Policymakers have a responsibility to inform small business owners and the self-employed about the implications of a rate increase. Small firms have lots to worry about with rising input costs, business rate hikes, flagging consumer demand, late payments, and an uncertain economic outlook, the last thing they need now is borrowing costs increasing at a speed they cannot absorb.

Often faced with financial problems, people retreat into that ‘Egyptian river’ known as denial. Even the most successful businesses can face financial problems and tackling them early and taking expert advice can be the key to a business sinking or swimming.

That’s why PKF Francis Clark’s business recovery service is first and foremost sympathetic and supportive. With limited companies, partnerships and sole traders, we examine the specific circumstances involved, looking to avoid formal insolvency procedures wherever possible. Throughout, we offer no-nonsense, practical advice. The focus is on trying to rescue your business and setting you back on your feet. If you are feeling financial pressure, the message is don’t delay, get in touch with an expert.

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