Interest Rate Rises & Inflation: The Impact and Benefits of Finance in the Current Market

We know the level of economic uncertainty the UK is facing right now can be daunting for many UK businesses. 

The last couple of years have seen many changes to the commercial finance market. With multiple announcements about interest rate rises, energy bills soaring and the cost-of-living crisis upon us, it’s a big ask for UK businesses to stay up to date with what’s in the news, but also the opportunities there are to ensure they are making the best financial strategy decisions to maximise the benefits available.

At Bluestone, we are working closely with our clients to ensure they are utilising the most effective options for their businesses, maximising tax savings, capitalising on deferred repayment options and accessing the most appropriate finance solutions for their needs.

The impact of interest rate rises and inflation in the current climate

In today’s current climate, understanding the state of the economy can help you better recognise how you should be utilising and managing your business’s finances. 

In recent months we have seen a rapid increase in the cost of living, higher energy bills, soaring interest rates, and the value of the pound dropping, putting financial strain on many people and UK businesses. 

The mini-budget

On the 23rd of September 2022, government introduced the mini budget to the public to combat the nation’s economic problems. Some of the key points announced in the mini budget were: 

  • A cut in the basic rate of income tax to 19%. 
  • A reversal of the 1.25% national insurance rise.
  • A freeze on energy bills that will cost roughly £60bn over 6 months.
  • Annual tax-free corporate investments allowance to remain at £1m indefinitely.

The budget came with its fair share of mixed responses and reactions, these being: 

  • The pound sterling fell sharply after the government’s planned spending increases and tax cuts were released, losing 3% against the US dollar. 
  • Banks and building societies withdrew several mortgage products in response to concerns about an increase in interest rates.
  • The International Monetary Fund (IMF) issued a statement criticising the plan because they believe “the nature of the UK measures will increase inequality”.

As a result of the negative response, the then Prime Minister, Liz Truss U-turned on a number of the decisions and subsequently replaced Kwasi Kwarteng with Jeremy Hunt who made further changes. We await to see what further changes are coming now Rishi Sunak is in office.  

Interest rate rises and inflation explained

In simple terms, higher interest rates make it more expensive for people to borrow money and encourage people to save more and spend less. With people spending less on goods and services overall, the prices of those things tend to rise more slowly – slower price rises mean a lower rate of inflation. 

The Bank of England (BoE) try to ensure that inflation remains low and stable to create a healthy economy and the Government sets a target for how much prices (overall) should go up by each year; the target is currently 2%. 

With inflation currently nearer 10%, interest rates need to increase to meet this target. The bank rate (more widely known as the ‘base rate’ or ‘interest rate’) influences all the UK’s other rates, including those you may have for a loan, mortgage, or savings account. 

We have all seen that the bank rate has increased from 0.1% last December, to 3% on the 4th November 2022, affecting everyone who has a loan or mortgage that charges a variable interest rate and putting a strain on their finances. 

If prices are and remain to be unpredictable, it can be difficult for people and businesses to plan how much they can spend, save, or invest. 

You can see how the rate of inflation has changed over the years on the Bank of England’s website here.

How to future-proof your assets

Despite the level of economic uncertainty at the moment, and the concern that we may be in this position for some time, there are some financial solutions that can support UK businesses retain capital and future-proof their assets. 

Consider refinancing recent purchases

Realistically operating costs are only going to increase in the coming months and cash will become even more precious to your business. Spreading the cost of your purchases over time via a finance agreement enables you to keep more cash in your business, boosting liquidity and cashflow. If you have recently purchased assets with cash, you might want to consider refinancing the assets. This will unlock the cash tied up in the assets so you can put it to better use in your business.

Investing in renewable technologies to reduce energy bills

With the increased uncertainty around energy costs, energy solutions such as solar and renewable technologies are becoming a viable consideration for many businesses across the UK looking at ways to reduce their energy bills whilst becoming more sustainable. 

Spreading the cost of going green using Bluestone’s finance solutions means you can spread the cost in line with the energy savings your business is likely to see, meaning immediate benefits for your business without the large upfront investment.

Financing your assets at a fixed cost 

When inflation is high, such as we’re seeing at the moment (10%), Net Present Value becomes an important consideration for UK businesses.

Net Present Value (NPV), in its simplest terms, is the value of money today compared to the value of the same amount, at a future point in time. 

As an example, £100 today, if we continue to see 10% inflation for the next five years, might only be worth £62 in real terms by 2027. If you spread the cost of your investment over those five years, the true value of your repayments (and therefore the actual cost you end up paying) will be significantly lower by the end of the term when inflation remains high; that’s well worth factoring in when you’re weighing up the cost of financing a project. 

Whilst it may feel like a substantial commitment for your business in the outset, financing your assets at a fixed cost can help you save money in the longer-term, keeping more capital in your business and ensuring you are being as cost-effective as possible.

Bluestone can arrange a variety of bespoke finance solutions to help you manage your business’ finances over the challenging months ahead, including.

  • Finance leases
  • Cashflow loan
  • VAT loans
  • Corporation tax loans
  • PI insurance loans
  • Self-assessment loans
  • Hire Purchase agreements
  • Invoice finance facilities
  • Commercial mortgages
  • Vehicle finance (personal or commercial).

What to expect in the coming years

The Government’s cap on energy bills means we may expect to see inflation rise a little further from where it is now (10%) to around 11% in October. It is expected that after that, it will remain around 10% for a few months before starting to fall to the Bank of England’s 2% target.

If necessary, the BoE will continue to raise interest rates further to bring down inflation to this target. What is still uncertain however, is how high interest rates will need to go in order for this to happen and is dependent on the economy. 

The BoE meet around eight times a year (approximately every six weeks or so) to evaluate further increase rate decisions, with the next announcement due to be made in December this year.  

Interested in finding out how Bluestone can support your business?

We can help businesses by obtaining the best funding options and facilities, quickly and efficiently, whilst ensuring your short-term goals and long-term ambitions are considered in your financial strategy. 

If you are interested in speaking to someone who can talk through how to best support your business, get in touch with us today. We will assess your individual circumstances and work with you to decide which finance solution would be the right choice for you. 

Complete the form below to send us an enquiry.

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