Phil McHugh, Senior Market Analyst, Currencies Direct comments on impact of an interest rate rise for SMEs:
“The first UK rate hike in over a decade has been largely priced in to the value of the pound. If we do see a hike from 0.25% to 0.5% we are likely to see a small but limited follow through in GBP strength. Many new SME’s have enjoyed a low interest rate environment and will not have experienced the impact of a rise in rates. The negative consequences of a cocktail of higher borrowing costs, higher wage pressures from employees and lower consumer demand will especially hit the growing SME sector.
“The main impact of a hike would be a reduction in confidence for consumers and firms already rattled by ongoing Brexit uncertainties and an erosion of growth which is already tepid. Some have argued the economy is still too fragile to cope with increased borrowing costs
“The direction of the pound longer term will depend on whether this is a one off hike as a corrective measure following the emergency rate cut post the Brexit vote or the start of a hiking cycle. It is more likely to be the former.
“The comments from the Bank of England on future policy direction assuming a hike will be very important. If there is a belief of more hikes to come it could spook consumers and businesses. However, it is likely that the Bank of England will work hard to reassure consumers and businesses that they are not commencing a hiking cycle and that post hike their expectation will be for interest rates to remain on hold.”