U.K. Businesses Warn Of Hit From Bank of England Rate Increase
U.K. Businesses Warn Of Hit From Bank of England Rate Increase
(Bloomberg) --
U.K. businesses warned that the Bank of England’s decision to raise interest rates will add to costs and may deter investment as they grapple with new restrictions to contain the omicron variant of coronavirus.
The move will also increase immediately the annual bill for servicing the national debt by 1.3 billion pounds ($1.7 billion) and affect just over 2 million households with mortgages. However, George Buckley, U.K. economist at Nomura International Plc, said the aggregate economic impact of the hike would be minimal.
Businesses groups said the increase in the BOE benchmark to 0.25% from 0.1% may push some companies into difficulty as they deal both with cost inflation and new virus curbs that are already hitting sales in sectors such as hospitality.
“The BOE’s decision was surprising given mounting uncertainty over the economic impact of the omicron variant,” said Suren Thiru, head of economics at the British Chambers of Commerce. “With the current inflationary spike mostly driven by global factors, higher interest rates will do little to curb further increases in inflation.”
Fhaheen Khan, senior economist at Make UK, an engineering lobby, said higher borrowing costs could make companies less willing to spend.
“Industry is bouncing back under very fragile circumstances,” Khan said. “Even a small increase in rates could upset this new balance and we must be careful to ensure that an increase in interest rates does not diminish a business’s appetite to invest in the future”
The immediate increase in the annual debt servicing bill is due to quantitative easing. The structure of the 875 billion-pound program means rate rises register immediately on the stock of government bonds the BOE holds.
For most households, higher rates will feed through slowly as half of the U.K.’s 11 million mortgage holders are locked in for three years or more, according to BOE data. Another 30% are locked in for two years.
Buckley at Nomura said effective rates have fallen since many of the original fixed-rate deals were taken due to fierce competition in the mortgage market. As a result, those homeowners are unlikely to face an increase in borrowing costs when remortgaging.
Charles Roe, director of mortgages at UK Finance, said most mortgage customers “will see no immediate change to their mortgage payments.”
©2021 Bloomberg L.P.