The Bank of England will hold interest rates at 5.25% for the fourth consecutive time, and opinions are already mixed on what this could mean going into 2024.
Over the past few years, the Bank has steadily increased rates, including as recently as last August, aiming to curb inflation rates, making the Bank’s latest decision all the more potent.
While many aren’t happy with the current interest rates standing at a 16-year high, the Bank is standing beside its decision to freeze them, likely until this coming summer. But what’s the rationale behind this decision, and what does this mean for startups and investors as we move into 2024?
The Decision To Freeze Interest Rates
The Bank has been gradually increasing interest rates in an attempt to cool inflation, as higher interest rates make borrowing more expensive, dissuading both individuals and businesses from taking on debt to fuel spending.
These efforts have already yielded results. Inflation, which reached a 40-year peak in October 2022, has sharply declined since then, currently resting at 4% – close to the Bank’s 2% target.
According to the BBC, the Bank’s recent inflation report anticipates a drop to the 2% target between April and June this year. Given the faster-than-expected progress toward this target, the Bank sees no immediate need to lower current interest rates.
After all, “We have had good news on inflation over the past few months,” Bank governor Andrew Bailey remarked.
“We need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates”, he continued.
Sky News reports the Bank’s anticipation of interest rate reductions in May or June as they approach their target.
Chancellor Jeremy Hunt noted, “It’s obviously very positive news for families with mortgages that interest rates appear to have peaked, but we should remember that inflation never falls in a straight line.”
Notably, Mr Bailey cautioned that while they anticipate reaching the 2% target, inflation might rebound in the latter half of 2024 due to fluctuations in oil and gas prices.
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While the Bank has defended its stance, reviews remain mixed, notably among the Bank’s decision-makers themselves.
As reported by the BBC, one Bank policymaker, Swati Dhingra, voted for an immediate cut in interest rates of 5% for the first time since the 2020 Covid pandemic. Conversely, two other members of the Monetary Policy Committee (MPC) supported an increase to 5.5%.
Despite this divergence, the remaining six members voted to maintain the current 5.25% rate, resulting in the decision to hold rates unchanged.
This watershed moment marks the first time there has been a three-way split on whether rates should rise or fall since the 2008 financial crisis.
And mixed opinions of the decision are not confined to the Bank’s policymakers.
Dr Dhingra’s fellow economists have voiced concerns that the decrease in the inflation rate toward the Bank’s target is “artificial,” attributed to the reduction in the energy price cap, and anticipate a rebound in inflation over the summer due to the resurgence in global energy prices.
If this is the case, could the Bank’s decision to keep interest rates high stifle our already damaged economy?
Mohsin Rashid, CEO of ZIPZERO, said: “While the Bank of England is not tightening the vice any further, the pressure on people’s finances remains painfully intense. For millions across Britain, holding the base rate at this level equates to crippling debt and mortgage repayments – sinkholes on their road to financial recovery.
“The cost-of-living crisis cut people deep, and these wounds are yet to heal. Now, with a government that refuses to provide meaningful long-term support for struggling households, the fact remains – consumers cannot wait for any lifelines to drag them to a better financial future.
“Savvy decision-making is a must for those struggling with high-interest rates, persistent inflation, or both. From analysing supermarket prices or adapting buying habits to shopping around for competitive deals and using cashback apps, creative thinking is key to weathering the storm.”
What This Means For Startups and Investors
As mentioned by Mr Hunt, the Bank’s decision spells good news for “families with mortgages that interest rates appear to have peaked”.
But what of startups and investors, how will this decision impact them?
As stated by Lily Megson, Policy Director at My Pension Expert: “Maintaining base rates is not an unexpected decision – perhaps inevitable given the sticky inflation of previous months. However, it offers no clear answers for those who have felt trapped in financial limbo for the past year.
“It’s impossible to say exactly when the battle between inflation and interest rates will end. However, more can and should be done to ensure those who are still struggling to plan for the future have access to adequate support.
“It’s therefore vital that the government takes affirmative action to ensure all Britons are able to access guidance and independent financial advice. These tools will empower Britons to make informed decisions, navigate the changing economic climate, and achieve a brighter financial future.”
Ms Megson’s statement underscores a significant point: the plight of everyday Britons stuck in “financial limbo” amid a tumultuous post-pandemic landscape.
For aspiring British entrepreneurs, persistently high interest rates may prolong their financial challenges as many startups rely on borrowing to kick-start their ventures.
However, with soaring interest rates, startups may be hesitant to borrow due to exorbitant costs.
While there is always the option to hold off until interest rates lower later this year, it being unlikely the Bank will want to keep them so high for long, many startups in need of capital may find themselves in financial limbo until rates decrease.
Even if a startup manages to launch, a high-interest environment may dampen consumer spending. Moreover, elevated interest rates can deter investors from injecting funds into startups as they seek returns that surpass borrowing costs, and high interest rates can stifle their returns.
As a result, startups may struggle to attract investment, hindering their growth and development.
High interest rates can contribute to increased market volatility, making investors more cautious and risk-averse. Volatile market conditions spell bad news for startups looking to raise capital through investments, making fundraising more challenging and uncertain.