The Bank of England has raised interest rates to 4 per cent in its first increase in more than three years, adding further pressure on UK retailers already grappling with squeezed consumer spending and rising operating costs.

The Monetary Policy Committee (MPC) voted eight to one to increase the base rate by 0.25 percentage points from 3.75 per cent, amid concerns that higher energy prices will push inflation further upwards.

The decision follows the ongoing conflict in the Middle East, which has driven oil prices higher and increased uncertainty around energy supply and transportation costs.

In September, BoE had warned inflation could near 5 per cent due to higher energy costs, poor harvests and extreme weather. It warned food prices could sharply jump higher over the coming months.

The rise presents a double challenge for retailers – higher borrowing costs for businesses and further pressure on household budgets.

An increase in interest rates can make financing more expensive for retailers, potentially affecting investment decisions around store openings, refurbishments, technology and supply chain infrastructure. Businesses with existing variable-rate borrowing could also face higher repayments.

Consumer spending is another concern. Higher borrowing costs can increase mortgage and other debt repayments, leaving households with less disposable income for non-essential purchases.

In October, UK consumer confidence plunged at its fastest rate since the Covid pandemic. The GfK Consumer Confidence Barometer revealed an 11-point drop in October to -24, down from -13 in September

This could particularly affect discretionary categories such as fashion, homeware, furniture and electricals, where consumers may delay purchases or trade down to cheaper alternatives.

The next interest rate decision scheduled for 17 December.

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