What does the latest BoE interest rate cut mean for businesses?

The Bank of England (BoE) cut interest rates in July for the first time since March 2020, marking the start of its long-awaited rate-cutting cycle.

Interest rates are now expected to decline steadily over the next 12 months, with some economists forecasting that the Bank Rate will be reduced to 3% by mid-2025, from its recent 15-year peak of 5.25%

But what does this mean for businesses operating in or trading with the UK? In this article, we look at the likely business impacts of the latest BoE rate cut.

Lower borrowing costs

With interest rates easing, the cost of borrowing should start to come down. This could present an opportunity for businesses to refinance existing loans at more favourable rates or to invest in growth by taking on new debt at a lower cost.

Whether it’s expanding operations, upgrading equipment, or launching new products, lower borrowing costs can make these initiatives more affordable.

However, it’s crucial to remain cautious – while cheaper credit can stimulate growth, make sure you avoid over-leveraging and only borrow with a precise strategy in place.

And, while interest rates are expected to keep declining, we can’t know for sure. Back in December 2022, most economists expected the BoE to stop raising rates in February 2023; instead, they delivered five more hikes to bring Bank Rate from 3.5% to 5.25%.

Increased demand

Many are hopeful that the recent cut to interest rates marks the beginning of the end of the cost-of-living crisis. Wage growth is outpacing inflation, which is back down near the BoE’s target, and falling interest rates should further loosen the squeeze on consumers.

This could mean that, as mortgage rates fall and confident consumers are more willing to use credit, people begin to spend more. For many businesses, the hope is that they’ll see an uptick in demand.

Therefore, it may be beneficial to be prepared to capitalise on an increase in spending activity to maximise your profits.

Such a strategy will be finely tuned to your particular business but could include increasing hiring to ensure your staff can cope with higher demand or upping your marketing and advertising spend to capture customers.

It’s important, however, to assess the risks, have contingency plans, and make sure you don’t overextend. Although spending is expected to pick up, the economy has been exceptionally unpredictable over the past three years. As always, be agile and ready to adapt.

A weaker pound

While most of the impacts of the BoE’s rate-cutting cycle will take a while to feed through to the rest of the economy, the value of the pound could change rapidly.

In the weeks before and after the BoE rate cut, the pound plunged by almost 3% against the euro and the US dollar. GBP/EUR plummeted from a near two-year high to a four-month low, while GBP/USD slumped from a one-year high to a one-month low.

This currency volatility can have a significant impact on businesses with FX needs, such as import/export businesses, companies with international payrolls, or firms paying overseas suppliers.

Exporters could benefit from a weaker pound, as they may receive more in GBP for sales in other currencies. Conversely, importers may find their purchasing power reduced, though this could be a boon to British producers, as homegrown products may become cheaper than imported goods.

However the changing value of the pound could impact you, it’s best to have a risk management strategy in place to protect yourself from volatility. This is where Currencies Direct can help.

We specialise in helping businesses navigate currency fluctuations with tailored FX strategies designed to safeguard your profits. Our team works with you to identify risks, implement a customised plan, and continuously adapt to market changes.

To learn more about our FX risk management or other business services, reach out to our team today. We’re here to help you make the most of your international transactions.