Businesses are facing soaring costs, potential contract losses and difficulties from all directions after the Bank of England raised the interest rate to a 14-year high of 3.5 per cent.
With inflation running at a near 40-year-high and energy and raw material costs continuing to rise, many companies have told Daily Focus they are feeling encircled as they get set to enter 2023 with the country in recession.
The Bank of England’s Monetary Policy Committee raised interest rates by 0.5 per cent on Thursday – the ninth consecutive hike since December 2021.
It follows figures released earlier in the week showing inflation had reduced slightly to 10.7 per cent in November – but remained close to the highest it’s been in four decades.
Although motor fuel prices dipped, the price of gas remains high. Official industry measures tracking the cost of the commodity show its price has risen sixfold in six weeks.
And this volatility is only set to continue, driven by war in Ukraine and other global factors, such as increased demand from China as it emerges from Covid-19 lockdowns.
John Tudor, Chairman of Rugeley-based Access Covers, said 2023 was likely to be a “rough ride”.
John, whose company specialises in designing and manufacturing steel access covers and drainage products for the civil engineering sector, said: “The first impact from the latest rise in interest rates is the potential downturn in turnover as projects that were viable become less attractive to investors.
“Without a doubt, nine consecutive interest rate increases – with the likelihood of more to come – will deflect the starting up of some big projects.
“That’s when it would hit Access Covers because we have a lot of major contractors who are dealing with multi-million-pound contracts. Obviously a 0.5 per cent increase in base rate has a drastic effect if you are borrowing, say, £10 million to finance a project.
“It will be even worse for companies that are borrowing money too and, subsequently, will have to pay back more – they will be hit with a double whammy.”
John, pictured above, whose company employs 30 people, said the rising energy costs were creating equally daunting challenges.
He said: “Over the next three months we are going to see many businesses coming out of contract on their energy bills.
“I know, for example, we come out of contract in January, and we’ve been told we are going to get hit with a £50,000 to £60,000 increase on our annual electricity bill.
“That cost can’t be absorbed. So we are going to have to increase our prices to cover these additional costs.
“That is going to fuel inflation again and my personal opinion is that the current figure of 10.7 per cent is not the end. I think we could see inflation at 12 per cent next year as these factors filter through. It means we really are in a vicious circle.”
Analysts are expecting interest rates to rise as high as 4.5 per cent next year but business experts say the Bank of England must think long and hard about the implications of further increases.
David Bharier, Head of Research at the British Chambers of Commerce, said: “With some evidence of inflation now beginning to ease, it will be vital that further interest rate action does not exacerbate the recession the UK is entering.
“The Bank of England now faces a conundrum of when to ease monetary policy, given that the main drivers of inflation have shifted from external factors, such as shipping and raw material costs, to domestic factors, such as energy and labour costs.
“Only business investment and growth will solve the stagflation problem. Firms need to see concrete actions on the measures that produce the right environment to invest, such as infrastructure, skills, and trade.”