The Bank of England’s decision to cut interest rates has been widely welcomed by business, but it comes with caveats. The 4.5% comes as it halved its UK growth forecasts for this year and warned households could expect renewed pressure from rising prices.
The Bank’s monetary policy committee voted by a seven to two to reduce the rates from 4.75%, to provide some financial relief to borrowers, given the Government’s struggles with a sluggish economy.
It also gave a hint of what’s to come, downgrading its November growth forecasts made from 1.5% to 0.75% recognising a fall in business confidence since the budget and Governor Andrew Bailey has indicated borrowing costs may be cut further this year – despite the short-term rise in inflation, warning of “a bump in the road” without lasting effect.
Stimson: decision ‘raised eyebrows’
Douglas Grant, Group CEO of Manx Financial Group, said the news “aligns with the positive news offered by the modest rise in UK GDP”, providing a potential boost for UK investments after a period of economic stagnation.
But he added: High inflation continues to squeeze costs and consumer spending, while geopolitical instability and fragile supply chains demand diversification and sustainable practices. With investment hesitancy rising, adaptable lending strategies and a focus on resilience are vital to navigating this uncertain economic landscape.”
His company’s research suggests that nearly a third of SMEs have paused or scaled back operations due to financial constraints.
“Given SMEs’ role in driving growth, employment, and innovation, the Labour Government must create a stable lending environment for their resilience and expansion,” he said, “although at this stage, the Government’s growth ambition hasn’t yet translated into legislation governing access to financing in the UK . Both traditional and alternative lenders are key to this, as inadequate financing could hinder recovery amid rising taxes, geopolitical tensions, and cost-of-living pressures.”
Peter Stimson, Head of Product at the mortgage lender MPowered, had an interesting take. “What matters here is not the decision,” he said. “It’s the vehemence with which it was taken.
“The markets had regarded a 25% rate cut as a nailed-on certainty. But what has raised some eyebrows is the strength of feeling among the Bank of England’s rate-setters. The only two dissenting voices on the Bank’s nine-member committee wanted to cut more, not less, off the Base Rate.
“All of which will lend credence to the idea that a flurry of further base rate cuts could be on its way. The swaps curve – which ultimately determines how lenders price their mortgages – is currently suggesting that we could see a further three base rate cuts by this time next year.
Smith: cut offers a ‘glimmer of hope’
“Swap rates can ebb and flow, but nevertheless the fact that the markets are now anticipating three more cuts should enable lenders to start trimming the rates they offer customers.
“January is traditionally a time of intense rate-cutting as lenders slug it out for market share, but last month’s competition was relatively subdued. That could now change.
“Demand from borrowers is strong, and separate data from the Bank of England showed the number of mortgage approvals jumped unexpectedly in December. Today’s decision may not open the floodgates immediately, but competition could heat up sharply in the coming weeks as lenders battle for borrowers’ business.”
Nick Smith, group managing director for the alternative finance lender Reward Funding said: “We naturally welcome any lowering of interest rates, but an 0.25% decrease is too little, too late and doesn’t go far enough when you consider the financial pressures businesses are currently under.
“As a lender which speaks to SMEs and entrepreneurs on a daily basis, we see first-hand that rising operating costs caused by pending increases to employee national insurance contributions and the minimum wage, are creating a cash flow squeeze that will only result in wage freezes, redundancies and further stifle growth.
“Cutting interest rates was a small glimmer of hope, but 0.25% does little to mitigate rising running costs or ease the financial burden being placed on so many firms by the government’s current approach to the UK economy.
Scott Douglas, Senior Director, Head of Debt Advisory at corporate finance firm Centrus, said: “The UK economy remains stagnant, with private sector employment declining – factors that strengthen the case for less restrictive monetary policy. November’s GDP growth of just 0.1% has led some analysts to downgrade their 2025 growth forecasts from 1.5% to a modest 1%. This economic slowdown is the primary catalyst for the BoE’s decision to lower rates.
“However, inflation remains stubbornly above the 2% target, with little indication that it will return to target levels by year-end, much to the Government’s frustration. Adding to the uncertainty is the potential escalation of Trump’s trade war, and the possibility of it hitting Britain with a retaliatory response from Starmer could further fuel inflationary pressures, complicating the central bank’s path forward.”
Related
Recession fears grow as inflation targets challenged
Where do interest rates go from here?