As the Bank of England increases interest rates to a 14-year high of 2.25% in a bid to stave off inflation, there are fears the additional pressure on businesses and households could push the UK into recession much faster. 

According to ICAEW Economics Director Suren Thiru, raising rates at this speed will inevitably have a chilling effect on the economy, further diminishing consumer and business confidence and increasing the financial squeeze on many borrowers.

“While the growing divergence between monetary and fiscal policy highlights the tough trade-off between soaring inflation and an ailing economy, it also exposes the muddled approach among policymakers in tackling these headwinds, undermining their credibility among consumers, firms and investors,” he says.

It puts more pressure on Chancellor Kwasi Kwarteng to deliver a credible plan through Friday’s fiscal event. “The mini budget must set out a clear tax and spend plan that explains how any fiscal support will be paid for, otherwise international confidence in the UK may fade quickly, weakening our economic prospects further and intensifying the strain on public finances,” says Thiru.

The Bank of England made the decision to raise interest rates as rising energy costs, even with the Energy Price Guarantee, will keep inflation above 10% for the next few months.

Giving a financial services perspective of the issue, Ion Fratiloiu, Chief Commercial Officer at Channel Capital Advisors, says that the move is a logical step, even if it significantly impacts the size and terms of loans that businesses can potentially afford.

“Rather than hit out at policy, we should instead consider what more can be done by SME lenders to help businesses in the current climate,” he says. “For me, it's about making better, faster decisions and removing unfair criteria that can hold them back.”

Fratiloiu wants to see finance become more accessible for SMEs and hopes that the current climate will drive innovation in the sector. "If we can make SME loans more equitable through better use of data and technology, we can help combat challenges such as rising inflation and interest rates to help SMEs access finance that will be so crucial to their long-term prospects."