The Monetary Policy Committee (MPC) of the Bank of England have reduced the Bank Rate to 4% (previously 4.25%).
The decision was made by a narrow 5-4 majority and required 2 votes. This perhaps highlights the uncertainty that continues in the economy.
📉What Factors Led to the Reduction?
The MPC’s report shows that they are predicting that inflation will peak at 4.0% in September and then fall back towards their 2% target. Because of the progress made in controlling inflation, the MPC felt that a further reduction was appropriate.
While UK GDP shrank by 0.3% in April and 0.1% in May, the MPC felt that this was because some of the stronger growth earlier in the year may have been boosted by businesses rushing to act before new tariffs or tax changes came into effect. As this timing effect washes out, Bank staff are predicting that growth will pick up to 0.3% in the autumn. Recent trade agreements may also provide more certainty to global trade.
However, despite these positive indications, the wider picture remains unclear. When interviewed, the Bank of England Governor, Andrew Bailey, commented that he believes interest rates will continue to reduce, but there is “genuine uncertainty about the course of the direction of rates and the path has become more uncertain.”
🧑🏻💼What Should Your Business Be Thinking About Now?
1) Cheaper borrowing, better investment opportunities: With the cost of borrowing now lower, you may have a fresh opportunity to finance growth at a reduced cost. Even previously marginal projects might now become financially viable.
2) Impact on cash reserves: On the flip side, if you’re holding large cash reserves, you’re likely to see lower returns on bank deposits. Could some of that capital be better deployed into higher-yield investments or strategic projects?
3) Potential boost in consumer spending: Lower interest rates often lead to increased consumer confidence and spending. If your business is in retail, hospitality or services, this could translate into a short-term lift in demand. Now could be a good time to consider whether a new promotional plan might help you capitalise.
4) Exchange rates: A rate cut can put downward pressure on the pound. If you export goods or services, that may make you more competitive abroad. However, it can also increase the cost of imports, which may mean revisiting where you source goods and materials from.
If you’d like to chat about what the interest rate cut means for your business, please call us anytime. Whether you’re planning to grow, manage risk, or adapt to everchanging market conditions, we’re here to provide you with clear, practical advice when you need it.
See: https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2025/august-2025