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Inflation and increased interest rates – What does it mean for businesses?.

Office for National Statistics (ONS) data revealed that the Consumer Price Index (CPI) – the official measure of inflation – only fell to 8.7 per cent in the 12 months to May 2023.

While the rate of inflation is not as high compared to previous months, where it peaked at 10.4 per cent in February, many economists had predicted a significantly lower rate of inflation.

As inflation is falling at a slower rate, the Bank of England (BoE) has attempted to curb this by increasing the base interest rate further to five per cent.

High inflation and the ever-increasing base rate are having a significant impact on many businesses in a number of different ways including:

Increased costs

Higher prices and costs are feeding the current rate of inflation. As the cost of raw materials, labour, and operational expenses rise, businesses are squeezing their profit margins.

While larger businesses may have the capacity to deal with these increased costs, small and medium-sized enterprises (SMEs), often operating on tighter budgets can find this situation particularly challenging.

Some businesses facing increased costs are mitigating this by raising the prices of their products or services.

This move needs to be handled carefully, however, as if prices are increased too much then it could drive customers away and cause a loss in revenue, while also feeding into inflation.

Equally, SMEs need to explore how they can drive existing costs down where possible by reviewing arrangements with suppliers and service providers.

Difficulty borrowing

Interest rate increases naturally mean that taking out loans will be more costly for businesses looking to borrow and will also affect any existing loans that are not on a fixed rate.

Increased interest rates can be a significant worry for businesses carrying a substantial amount of variable-rate debt, as higher interest rates ultimately mean higher borrowing costs.

While the current five per cent base rate is the highest it has been since 2008, economists predict that interest rates could peak at six per cent by the end of 2023 – something businesses should consider as they plan their budgets for the next 12 months.

The higher rates of interest have also affected access to finance, as lenders adjust their approach to lending due to concerns about businesses servicing their debts. Many are, therefore, applying more stringent credit and affordability checks.

HMRC debts 

Tax debts to HM Revenue & Customs (HMRC) track the BoE base rate. In its simplest form, this means that the rate of interest for the late payment of taxes is calculated as the base rate plus 2.5 per cent.

The rate of interest paid by HMRC on the overpayment of tax is also calculated as the base rate minus one.

There are various other rates of interest charged by HMRC, which can be found here. As the rate of interest increases, so does the cost of late tax payments.

Although inflation rates are currently higher than predicted, the BoE has stated that the increase in interest rates will see the inflation rates fall in the coming months, as they attempt to push it down to the two per cent national target.

If you are a business owner who would like assistance navigating the current economic climate, please contact our expert team today.

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