Bank of England’s path of pain: Interest rates expected to remain high
Today the Bank of England announced interest rates would rise for the 14th time and warned investors should still expect a bumpy road ahead.
Announced at 12pm, the Bank of England stated that rates would rise from 5% to 5.25% in a bid to keep England from entering a recession.
In a three-way split on the Bank’s nine-strong monetary policy committee (MPC), officials said the economy had proved more resilient during a period of high interest rates than they expected when they last assessed the UK economy in May.
Although Inflation rates fell a significant amount in June, to 7.9% from 8.7% in the previous month, energy prices were expected to fall over the rest of the year, bringing inflation down below 5% in the fourth quarter, allowing the government to declare victory in its mission to halve inflation by the end of 2023.
However, the Bank of England have claimed a strong demand for workers and a rise in the cost of services that has only just reached a peak were proving a persistent barrier to halving inflation.
Against this backdrop, two members of the MPC voted to increase interest rates by 0.5% following a succession of forecasts that had ‘under-predicted’ inflationary pressures and the possibility that the latest outlook would repeat the error.
The Bank’s governor, Andrew Bailey, who backed the quarter-point increase, said the MPC’s efforts meant inflation was on course to fall towards its 2% target.
Mr Bailey said: ‘Inflation is falling and that’s good news. We know that inflation hits the least well-off hardest and we need to make sure that it falls all the way back to the 2% target. That’s why we’ve raised rates to 5.25% today.’
However, news of the interest rates being raised to the highest level since April 2008, hasn’t been received well by everyone.
Clare Trachet, CEO and Founder of Trachet, a company that has been dedicated to helping entrepreneurs since 2016, said: ‘Today’s interest rate announcement, although expected and necessary, continues to bring uncertainty to the UK’s investment ecosystem – ultimately impacting recovery for the remainder of the year and impairing growth going into the Autumn.
‘The current economic climate is presenting major challenges for companies with limited cash reserves. The Bank of England announcing an interest rate rise to 5.25% coupled with an inactive IPO market, means scaling businesses – predominantly in tech – are finding it increasingly difficult to secure funding.
‘This is a significant concern for even healthy privately-owned companies, as declining shares of similar publicly traded firms can lead to a decrease in their value. We know companies will have to make difficult decisions and give up a larger portion of their equity in order to raise the same amount of cash and expect this to result in a growing number of down rounds in the coming year.’
‘The uniquely favourable conditions experienced in the past decade are unlikely to return, these conditions were defined by a prolonged span of exceptionally low global neutral interest rates, plentiful resources, and limited inflation,’ Clare said. ‘Therefore, investors and businesses alike should adapt to the current market conditions by focusing on value creation and profitability over headcount growth and valuations.
Image: Etienne Martin