Interest rate reduced to 5% – business industry reaction

The Bank of England’s Monetary Policy Committee (MPC) has voted by a majority of 5–4 to reduce Bank Rate by 0.25 percentage points, to 5%. Four members preferred to maintain Bank Rate at 5.25%. Inflation has held at 2% for 2 months, although it is expected to rise to 2.75% in the second half of the year

Commenting on the decision Suren Thiru, ICAEW Economics Director said “The decision to cut interest rates will provide much needed cheer to those households grappling with onerous mortgage costs and to businesses trying to access the finance they need to grow.

“While this rate cut marks a notable shift in direction, the financial reality facing households and firms won’t materially change, as this is just one step back from the previous period of 14 rate hikes.

“The split vote decision among rate setters suggests this was a rather hawkish rate cut, so this policy loosening is unlikely to herald the start of a major interest rate-cutting cycle.

“With the bank forecasting that inflation will drift higher in the coming months, the Monetary Policy Committee is likely to put off lowering interest rates again until the end of the year.”

Gary Wilkinson, CEO and co-founder of Redwood Bank, said  “The Bank of England’s decision to reduce base rate is positive news for businesses, particularly those with variable rate mortgages. Professional landlords will welcome this reduction as mortgage finance forms a significant part of their costs. Those with variable rate mortgages should see an immediate reduction in their borrowing costs, boosting their margins and increasing their ability to invest in growing their businesses.

“Landlords and other businesses looking for a new commercial or residential buy-to-let mortgage or wanting to refinance an existing mortgage may also benefit.”

James Burgess, Head of Commercial and Insolvency expert at Atradius UK, said “Having held interest rates at a 16-year high of 5.25% for an entire year, businesses and consumers across the UK will be relieved at the outcome of today’s announcement with rates falling to a welcomed 5%.

“This positive outlook for the economy is also reflected in our own claims data with an overall decline of 17% in late and failed payments in Q2 2024 compared to Q1 2024. This trend has continued into the construction sector, following a 28% decline in late and failed payments in the sector in Q2 2024 compared to Q1, showing a step in the right direction for the sector following today’s rates cuts. This will also be welcome news to homeowners as the cut in rates alleviates their financial burdens around mortgage payments, putting the construction and housing sectors in an improved position as we progress through the second half of the year.

“For businesses, this news will mean that they can navigate the summer season with more confidence. Consumers may feel less restricted in terms of spending as this cut in rates could start to loosen purse strings. As well as a boost to consumer spending, business confidence and investments may improve over the coming months.

“Whilst we are not out of the woods yet, the outcome of today’s announcement is certainly a step in the right direction for the UK economy, offering hope as we move through the remainder of the year. With inflation rates remaining at their target of 2% and interest rates sitting at 5%, it’s safe to say that the economic position of the UK is improving. However, despite falling rates, the unpredictability of major world events, not least geopolitics and fears of war between Iran and Israel, mean it’s essential that businesses remain vigilant and protect themselves against the domino effect of insolvency with proactive financial planning. This includes increasing liquidity, diversifying supply chains, and protecting vulnerable credit agreements with trade credit insurance.”

Michael McGowan, Managing Director of Foreign Exchange, at Bibby Financial Services“After months of no change, today’s interest rate decision is a declaration of economic confidence from the Bank of England that will echo through international markets. 

“Following the European Central Bank and the Bank of Canada, the Bank of England’s rate cut seeks to stimulate growth, not least among smaller businesses buoyed by the prospect of more affordable lending.”

Anna Leach, Chief Economist of the Institute of Directors, said “Today’s 5-4 vote by the MPC for a rate cut will give some welcome relief to businesses and households squeezed by the high cost of finance. Although key measures of domestic inflation persistence have not come down as much as the Bank would have liked, they are clearly content that sufficient progress has been made to warrant a slight reduction in rates.

“We’re not expecting much more by way of rate cuts this year. The IoD’s economic confidence measure has improved materially over the past 6 months and broader data on the economy points to momentum holding up despite the high level of interest rates. With wage growth and services inflation still high, and headline inflation expected to rise in the coming months, monetary policy is set to stay restrictive for a good while yet.”

Federation of Small Businesses (FSB) National Chair Martin McTague said “This rate cut was desperately needed, and small firms will give it a warm welcome as a harbinger of more cuts yet to come.

“The base rate’s previous high plateau placed huge pressure on small firms, adding to a difficult operating environment which has been making it far too hard for small firms to grow. Today’s cut will not reverse or immediately stem the financial pain, but it signals that – finally – things are moving in the right direction.

“Small firms have been telling us for some time that it is hard for them to access affordable finance, an issue which is a significant barrier to growth – every finance application that is denied, or every loan request that isn’t submitted in the first place due to high interest rates or pessimism about the state of the lending market means a missed opportunity for investment and expansion.

“There is a place for the Government now to act decisively so small firms can be confident in borrowing money to invest – that means taking decisive action to end poor payment practices and closing the regulatory gap on personal guarantees which leaves so many entrepreneurs fearing for their homes when they take a risk.

“Unlocking economic growth is the Government’s stated goal, and ensuring that small businesses with big dreams for the future are able to get the funds they need to put their plans into action is a key component of stimulating the economy.”