Will The Rise In Interest Rates Push Energy Bills Up Even Further For Businesses?

by | Jun 6, 2022

Will The Rise In Interest Rates Push Energy Bills Up Even Further For Businesses?

The Monetary Policy Committee of the Bank of England has voted to boost UK interest rates to 0.5 percent in response to inflation reaching its highest level in 30 years.

The Bank of England now predicts that inflation will peak in April 2023 at roughly 7.25 percent.

The Financial Times has said, markets now expect the Bank of England to raise interest rates to at least 1% by May, and 1.5 % by November – a level not forecast to be achieved until March of next year.

The energy regulator, Ofgem, has also stated that the energy price cap, which limits how much suppliers can charge in the United Kingdom, will be raised on April 1. Because of the unprecedented spike in worldwide gas prices, the cap will jump by £693.

Many see rising inflation, relatively poor wage growth, tax increases, rising interest rates, and rising energy prices as a perfect storm. The government has responded by putting together a package of assistance for suffering households.

In response to the impact of the rate increase, Bank of England governor Andrew Bailey stated, “It is a difficult message, but the alternative is worse.”

“The policy advice is for Bank Rate hikes to be delivered more swiftly rather than to a considerably higher endpoint over the long run,” said Ross Walker, NatWest Markets’ Chief UK Economist.

You have time to consider how they might affect your business now and in the future.

Areas you should consider include: 

Revising Your Business Plan

Are your goals adaptable enough to weather the current storm? Examine your current business plan to see if it is still relevant. Examine the nature and extent of your debt.

Businesses should be prepared for any scenario and be aware of the hazards of overextension while borrowing in a rising-rate environment. Businesses with corporate credit cards and current loans may face higher interest payments, less discretionary income, and greater overheads as interest rates rise. In some situations, the business may end up repaying simply the interest on the loan rather than the principal.

Increased interest rates may also lead to businesses choosing for shorter-term loans that are related to cash flow and pose larger risks, potentially leading to additional negative consequences.

You can talk to your bank about if your available capital is sufficient to keep you going.

The Value Of The Pound

Higher interest rates can cause currency values to rise. If a company’s income is denominated in a foreign currency, interest rate rises, and hence rising sterling, will have an impact on its profitability.

Forward agreements can be used to reduce the risk of exchange rate differences in situations when your company conducts foreign currency transactions.

Monitor Your Supply Chain

Companies must be mindful that while they may be relatively shielded if prices rise or payment terms and balances payable alter, their essential partners, i.e. their customers and suppliers, may not be.

Even if your company’s finance is unaffected by interest rate fluctuations, your suppliers’ pricing may rise to pay additional interest charges. Contracts to fix supply prices can help to mitigate this risk.

Nonetheless, rising interest rates force corporations’ hands, with inflation ramping up the pricing of production, distribution, energy costs and commercial services, which then cascades down the corporate supply chain.

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