The bigger-than-expected increase in interest rates to the highest level since the 2008 financial crisis will pile more pressure on consumers and retailers, a leading credit insurer has warned.
The Bank of England this week lifted the interest rate to 5%, the highest since 2008, as it struggled to bring down inflation, which has fuelled a cost of living crisis that has already impacted shoppers and retailers for more than a year.
The increase is likely to make mortgages more costly, impacting consumers’ disposable spending power, and raising fears that retailers’ performance – especially big-ticket players – will be affected as a result and that retailers’ own borrowing will become more expensive.
Leading credit insurer Atradius’ underwriter manager Owen Bassett said: “The retail and hospitality sectors are likely to be hit hard as shoppers start to feel the pinch from extended high interest rates and the high cost of borrowing. UK consumers typically rely heavily on personal borrowing but as costs continue to increase, disposable income will dwindle and personal spending in retail and hospitality will take a hit.
”Firms across all sectors will also struggle to borrow over the coming months as existing arrangements end and companies re-enter the market.”
The credit insurer’s nervousness about retail prospects will unnerve retailers because the withdrawal of such cover when conditions are tough can make it much more difficult to trade as normal and has even been blamed for pushing some retailers to collapse in the past.
So far, the Bank of England’s efforts to reduce inflation have come to little, prompting some commentators to argue that it may be necessary to create a recession to bring inflation under control.
Addressing inflation is a key government objective but many doubt prime minister Rishi Sunak will achieve his target of halving it by the end of the year.
BRC chief executive Helen Dickinson said: ”Despite some prices continuing to rise, we are seeing a regular stream of price cuts being reported as retailers do their best to ease the cost of living pressures faced by customers.
”Meanwhile, households are about to find themselves squeezed by higher mortgage repayments as a result of the recent interest rate decision.
”If government wants to ensure inflation rates continue their downward trend, they should review those incoming policies that could push up costs for businesses.”
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