Date: 04.07.2023

Supply chain impact of interest rate rises

On 22nd June the Bank of England surprised markets and the public with the size of their latest rate hike, increasing their Base rate to 5% from 4.5%, putting the rate at the highest level for 15 years, with implications for shippers and supply chains.

Bank of England governor, Andrew Bailey, said that if the BoE didn’t raise rates now “it could be worse later”. Commentators believe BoE policymakers may have felt forced to hike by 50bp rather than the 25bp originally expected after the recent hot inflation report for May.

Supply chains are likely to be affected by increased borrowing costs, potential reduction in investment and muted demand as consumer spending starts to stall. Which may require businesses to reduce production or orders and/or be left with higher costs, due to larger than anticipated inventory storage.

As ever, the result of increasing interest rates has far reaching implications for currency transactions, with GBP/USD trading briefly at a level not seen since late April 2022.

The impact on companies and consumer’s finances is leading to lower demand from all areas as evidenced by recent reductions in freight rates. The importance of companies to ensure they have the correct levels of forecasting and visibility at all levels throughout their supply is becoming more critical with each passing BoE meeting.

In the wake of the expected impact on the economy, markets revised up further expectation for the terminal point for the UK’s interest to north of 6% as such the belt tightening and downward pressure on demand and by extension freight rates, looks set to continue into next year. 

Expectations are that rises of at least 100bp more by the end of this year including a combined increase of more than 75bp at the next two updates in August and September. 

The Bank of England’s forward guidance offered few clues on its next move as it merely repeated the previous wording that further tightening would be required if there was evidence of more persistent inflationary pressures. However it was notable that in contrast to some previous updates, the Monetary Policy Committee did not question the scale of the market expectations.

For out of the box thinking on how Metro can help your business survive and thrive in these difficult times please contact us to arrange a free supply chain health check  and see where the efficiencies and cost savings are for your business.

If you would like to learn more about the above, or to discuss any of the issues raised here please EMAIL Laurence Burford, Finance Director at our Birmingham HQ.