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Base Rate Drops to 4.5%: The Impact on Businesses
The Bank of England has cut the rate to 4.5% - we explain what this means for your business.
The Bank of England has reduced the base rate to 4.5%, lowering the cost of borrowing and offering potential relief to businesses across the UK. This decision comes as policymakers aim to balance inflation control with economic growth amid ongoing uncertainty in global markets.
With a lower base rate, businesses can expect reduced borrowing costs as commercial banks pass on savings through lower interest rates on loans. This could encourage companies to invest in expansion and recruitment, but this could be slow-moving in the face of last year's Autumn Budget raising costs for businesses, as well as concerns for the country's economic growth.
The extent of the benefits will depend on how much lenders adjust their own rates. In the face of Trump's impending tariffs, there are worries that it will trigger a trade war, which would have a knock-on impact on the UK. Some experts predict that a trade war could suppress UK GDP by as much as 5%.
How Does the Bank of England Impact Business Loan Interest Rates?
Interest rates play a vital role in the economy, affecting both individuals and businesses. They represent the cost of borrowing money and the return on savings, typically expressed as an annual percentage of the total amount.
This is why it’s always cheaper to use money from your pocket rather than borrowing, because that won’t incur the additional costs that come with borrowing from a lender. However, most people don’t have the funds at hand to launch or expand a business. In fact, over 46% of businesses used external finance in 2023.
While changes to the base rate impact borrowing and saving costs, lenders will adjust rates based on their operational needs. After all, a bank itself is still a business with running costs to cover.
A lower base rate reduces borrowing costs, boosts asset values, and encourages spending by making saving less attractive. Conversely, higher rates make borrowing more expensive, limiting consumer spending and increasing business costs.
For businesses, interest rates directly affect cash flow and investment decisions. High rates can increase fixed costs like wages and supplies while reducing consumer demand, making it harder to remain competitive. The cost of business loans also varies depending on the type of financing available, influencing expansion and operational strategies.
How Consumer Spending Affects Business Revenue
Lower interest rates typically lead to increased consumer spending, as individuals find it more affordable to borrow and have more disposable income because of this. and the opposite is also true. For example, across the UK, high interest rates have as much as tripled some people's monthly mortgage payments, making housing more expensive.
Landlords also raised rent to cover the mortgage payments on their properties, which impacted the average rent in competitive rental markets. The resulting financial strain meant that most consumers had less disposable income, and also caused inflation to drop gradually in response to the limited purchasing activity.
This could provide a boost to businesses reliant on consumer demand, such as retail, hospitality, and property. Last year, consumer confidence wavered. So, this reduction in borrowing costs could help stabilise spending patterns and support revenue growth, just as long as inflation remained under control.
Despite the rate cut, businesses could still face broader economic headwinds. The UK’s sluggish growth, political uncertainty across the globe, and the prospect of new trade restrictions under Trump's administration are all affecting market confidence.
Recruitment firms have already reported hesitancy among employers to take on new staff due to economic unpredictability. While lower interest rates should, in theory, incentivise hiring, many companies may remain cautious in the short term until they see clearer signs of economic stability.
One recruitment firm reported that the number of role in London’s finance sector dropped by 12% year on year in 2024.
Sector-Specific Impacts
Many SMEs, particularly in the North East and North West, have cited funding access as a key hurdle to growth. Lower borrowing costs could ease this burden, enabling investment in new products, marketing, and technology. In fact, according to recent data, the North has stayed relatively buoyant in the face of last last two years' economic hardship. 40% of business owners in the North don't think their business plans would be affected by a lack of access to funding.
While controversy around the Autumn Budget has died down, there are still concerns over government tax policies affecting farming and food production. Supermarkets, including Tesco and Co-op, have called on the government to reconsider inheritance tax reforms, arguing they could put further strain on UK farmers.
The UK property sector has been under pressure due to rising borrowing costs in recent months. While a lower base rate may ease some of this strain, developers and investors will be watching gilt yields and government borrowing levels closely.
But it certainly still presents a glimmer of hope for UK businesses. For two years, the landscape has had an atmosphere of cautious optimism, among lay-offs, high borrowing rates and political upheaval - all of which is no mean feat.
For now, businesses will need to weigh up whether this is the right moment to invest, or whether uncertainty still warrants a more cautious approach.
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