Small businesses will pay the price of the interest rate hike say the FSB.

The Bank Of England's decision to increase the base line from 1.25 per cent to 1.75 per cent is the biggest rise in 27 years - with inflation now set to hit more than 13 per cent.

New figures show house prices, hirings and the construction industry all saw drops in July amid warnings about the impact of higher interest rates and cost of living crisis.

Martin McTague, national chair of the Federation of Small Businesses, said the rates hike will leave thousands of firms with less financial room to manoeuvre, amid a cost of doing business crisis.

Its latest Small Business Index showed costs are at a record high for 89 per cent of small businesses driven by fuel, utilities, inputs, labour and tax hikes.

"The need to get a grip on inflation is clear, " he said.

"Moving interest rates is not without consequences: it's removing steam from the economy at a time of meagre growth. Small businesses already face grave uncertainty as they try to recover from the impact of Covid, while contending with the cost of doing business crisis."

Many will now face higher costs in paying back loans which are not protected by fixed rates. And it will also hamper attempts to get back to a functioning commercial lending market as new products will become more expensive and small firms will find it harder to access affordable credit.

Mr McTague said small businesses are already fighting an "uphill battle" with energy bills soaring by as much as 500 per cent in recent months and they do not have the protections of consumers or negotiating power of their larger counterparts.

He said struggling micro-businesses should be offered help on energy costs to match that being given to households and the Government should reverse the hike in National Insurance, cut VAT and fuel duty, and introduce new reliefs on business rates.

He added: "The cost of living crisis can't be solved without at the same time solving the cost of doing business crisis."

Alpesh Paleja, lead economist at CBI, said: "It's clear that we're in for a hard winter. With another hefty rise in Ofgem's energy price cap looming, support for the most vulnerable households and businesses should be kept under review."

She said the new Prime Minister must prioritise boosting productivity through greater business investment via incentives and business rate reforms.

Kitty Ussher, chief economist of the Institute of Directors, welcomed the "decisive action" by the Bank of England.

"With energy prices continuing to rise, strong intervention is needed to increase confidence that we will soon be through the worst, so that boardroom decision-makers can plan ahead with greater certainty.

"At the moment two-thirds of our members believe the inflation rate will continue to rise until at least the Spring of next year, with a large number thinking the peak will come even later."

Hiring has slowed following warnings of an autumn recession. July saw the slowest increase in the number of permanent jobs filled for 17 months, according to a report by KPMG.

UK house prices fell in July for the first time in more than a year, according to Halifax, down 0.1 per cent month on month to an average of £293,221.

Meanwhile the construction industry has declined for the first time in 18 months, according to the S&P Global/CIPS construction purchasing managers' index (PMI).

It fell from 52.6 to 48.9 in July- the first decline since January 2021 and the worst reading overall since May 2020.

Punchline says: "The media has got to be careful that they don't talk us into a deeper recession by making people too scared to go out and spend money on their usual takeaway, trip to the pub or hobby."