Bank of England raises interest rates to 4% as inflation pressures mount

The Bank of England has increased interest rates from 3.75% to 4%, marking its first rise in more than three years as policymakers respond to renewed inflationary pressures driven by higher energy and fuel prices.

The Monetary Policy Committee (MPC) voted by eight to one to raise Bank Rate by 0.25 percentage points, with one member favouring a larger increase of 0.5 percentage points to 4.25%.

The decision, announced on 5 November, comes amid rising petrol and diesel prices and concerns that higher energy costs could fuel inflation over the coming months.

The increase will raise borrowing costs for households and businesses, affecting mortgages, loans and other forms of credit, while potentially benefiting savers through higher deposit rates.

For the UK’s specialist lending and asset finance sectors, the decision adds further pressure to businesses already facing elevated operating costs and challenging trading conditions.

Mike Randall, CEO of Simply Asset Finance, warned that higher borrowing costs could discourage SMEs from investing at a time when improving productivity remains critical to economic growth.

“A rise in interest rates adds yet another pressure to SMEs, with many already navigating higher operating costs and difficult trading conditions. To keep the economy moving during this period, we need to improve productivity by giving businesses the funding to invest and pursue growth.

“With borrowing costs high and businesses already squeezed some may be put off investing, while others may feel pressure to access capital quickly. It is critical in times like these that businesses secure funding that works for them in the long term. Affordability and suitability must remain at the heart of SME lending.”

Randall emphasised the importance of lenders working closely with businesses to ensure funding remains appropriate and sustainable.

“Ultimately, lenders need to step up as genuine partners to SMEs, helping them access the right funding solution, at the right time, so they can invest strategically, improve productivity, and continue to grow.”

Neil Rudge, Chief Banking Officer at Shawbrook, said the decision represents a significant shift from expectations earlier in the year, when financial markets had anticipated further interest rate cuts.

“The first rate rise since August 2023, and a long way from where the year began, when markets were pricing in cuts. The war in Iran has torn up that script, and with energy costs pushing prices up, inflation pressure looks set to run well into 2027.”

Rudge also highlighted the challenges facing mid-sized businesses, which he argued had received limited support from the recent Autumn Budget.

“The mid-sized businesses driving a disproportionate share of jobs and growth got little from it, and they’re picking up the bill for a higher minimum wage. Yet they aren’t retreating. Our research shows 92% of mid-sized businesses plan to invest in the next year.”

Theo Chatha, Group Chief Financial Officer & Managing Director of Specialist Finance at Bibby Financial Services, noted:

“Today’s interest rate rise is another blow for SMEs already feeling the squeeze, particularly after a disappointing Budget. Over half (52%) of SMEs told us lower interest rates would make them more confident to invest, yet today we’ve seen the opposite happen. This rate rise will increase borrowing costs, put investment plans at risk, and leave the UK’s small businesses with even shallower pockets.

“For exporters, the pressure is even greater. SMEs trading internationally often wait months to be paid by overseas buyers, so higher rates make bridging that gap more expensive. Our International Trade Report found that two-thirds (67%) of SME exporters already say that international trading conditions have increased pressure on their cashflow over the past year, and 29% are struggling with currency volatility.

“SMEs haven’t lost their ambition to grow, and there are practical steps they can take to keep that growth on track. Protecting cashflow is critical – business leaders should assess their funding mix, and if they trade overseas, treat FX management as essential rather than optional. Those who act now to put the right strategies in place will be in the best position to keep their growth on track.”

The rate increase places renewed focus on the availability and affordability of business finance, particularly for SMEs seeking funding to invest in equipment, technology and expansion.

Attention will now turn to the Bank of England’s guidance on the future direction of monetary policy and whether further increases could be required to contain inflation.