The Bank of England has cut interest rates from 5.25% to 5%, its first drop since the pandemic in March 2020. The Bank of England governor, Andrew Bailey, said inflationary pressures had “eased enough” to enable the first cut since the Bank stopped ramping up borrowing costs this time last year. Interest rates soared in previous years, as the Bank raised borrowing costs to its highest level since the 2008 financial crisis in response to soaring inflation. However, Bailey said savers and borrowers should not expect large reductions over the coming months, amid concerns about lingering economic risks.
“We need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much,” he said. “Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country.” The Bank’s decision to cut interest rates and ease pressure on households came after a sharp fall in inflation this year. This will be a welcome step for Prime Minister Keir Starmer to revive the economy and throw a lifeline to small businesses. SMEs can rejoice on the news with clearer skies ahead. With pressure easing off households, people will have more disposable cash therefore increasing revenue for businesses this summer.
“Growth and investment could be back on the agenda for smaller companies when lowering interest rates on business loans and other lines of credit gives them more breathing space,” Amy Knight, small business expert at NerdWallet UK, said. “The cut to the base rate could also help small businesses dependent on discretionary spending. With the summer holiday childcare costs straining household budgets this month, cheaper borrowing should help boost spending power, increasing revenue for leisure, retail, hospitality and tourism firms. Businesses with healthy cash reserves have benefited from higher interest rates, allowing their cash reserves to grow faster than inflation. But, the reduction in the base rate is expected to lead to lower returns on savings.”
SMEs can benefit from a cut in interest rates and lowered borrowing costs after a challenging few months. Small businesses should take advantage of this and seek advice from their accountants on how to capitalise on the change. “For many small businesses in the UK, the cut in interest brings much-needed relief amidst a challenging economic climate marked by rising costs,” Pauline Green, Head of Product Compliance & Programs at Intuit QuickBooks UK said. “A robust resurgence in the UK economy hinges on the revival of small businesses, many of which have been borrowing. Speak to your accountant about re-financing any existing loans to take advantage of the lower interest rate and seek financial advice about new potential investments to capitalise on the announced reduction.”
However, some say the future remains uncertain for SMEs. Future interest rate decisions remain unclear, and with inflation and volatile energy prices still looming, SMEs should ensure they have a solid financial plan for the months ahead. “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,” Michael McGowan, Managing Director of Foreign Exchange, at Bibby Financial Services said.
“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. Nonetheless, the path ahead remains uncertain. Against a backdrop of stubborn services inflation, and with energy price rises expected later in the year, future rate decisions remain unpredictable. For businesses trading internationally, currency volatility remains a thorn in the side and they will need to fortify their FX strategies to navigate the choppy waters ahead.”
