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UK’s small businesses would welcome an interest rate cut
As we saw yesterday, weakness in the UK economy will likely steer the MPC towards a 25 basis point cut today, despite inflation running high at 3.6% in June.
One group that is feeling the pinch of economic weakness is the UK’s 5.5 million small- and medium-sized businesses (SMEs). These have been struggling against higher employment taxes, increased expenses and elevated costs of borrowing in recent years.
“As a result, business confidence has taken a hit, the jobs market has weakened, and growth is in a state of stagnation,” comments Jamie Stewart, CEO of business banking platform binq.
Stewart says that an interest rate cut would be welcome news to the UK’s SMEs, as it would reduce their costs and increase consumer spending power.
“SMEs are the backbone of the economy, employing 16.6 million people, and generating £2.8 trillion in annual turnover,” says Stewart. “If the government is serious about a plan for growth, then it starts with working with the Bank of England and businesses to make it happen.”
UK small businesses, like these in Windsor, would welcome an interest rate cut
(Image credit: Manfred Gottschalk via Getty Images)
Recap: economic weakness expected to prompt an interest rate cut
Central banks need to balance two separate mandates: controlling inflation, and supporting economic growth. The two are often correlated: greater growth in the economy means there is more money, which pushes costs up. In these instances, central banks increase interest rates to reduce the flow of money and the incentive to spend.
It isn’t always that simple. Sometimes inflation goes hand-in-hand with weak or negative economic growth. This perilous scenario is called stagflation, and the UK economy risks slipping towards it.
“The MPC are once again facing crosswinds in their forthcoming meeting to determine bank lending rates,” says Steve Matthews, investment director, liquidity at Canada Life Asset Management.
While remaining aware of the uplift in inflation, the MPC will likely lean towards cutting interest rates to protect the UK economy.
“With inflation still expected to return to the 2% target by 2026, we believe the MPC will continue to prioritise economic support,” said Matthews. “Markets have already fully priced in this move, and we see potential for at least one further cut by year-end.”
Interest rate announcement due today
Good morning, and welcome back to our rolling coverage of UK interest rates, as the Monetary Policy Committee (MPC) announces its latest base rate decision today at 12pm.
As a reminder, the expectation among economists and markets is that the MPC will cut UK interest rates by 25 basis points, to 4.00%.
We’ll look in detail this morning at what lower interest rates could mean for your money. Then, this afternoon, we’ll bring live reaction to the MPC’s decision.
That concludes today’s coverage, but we’ll be back tomorrow morning with more on what an interest rate cut could mean for your money. We’ll also bring live updates and reaction following the MPC’s announcement.
When will the MPC announce its interest rate decision?
As a reminder, the Monetary Policy Committee’s (MPC) base rate decision will be announced tomorrow (Thursday 7 August) at 12pm.
Read our explainer for more information on future MPC meeting dates.
How did the MPC vote at its last meeting?
The Monetary Policy Committee (MPC) is a working group of nine members, each of whom votes on interest rates at each meeting.
At the last meeting, three of the nine – Swati Dhingra, Dave Ramsden and Alan Taylor – voted to cut interest rates to 4.00%. The remaining six voted to keep them unchanged at 4.25%.
|
MPC member |
June 2025 meeting interest rate vote |
|---|---|
|
Andrew Bailey |
4.25% |
|
Sarah Breeden |
4.25% |
|
Swati Dhingra |
4.00% |
|
Megan Greene |
4.25% |
|
Clare Lombardelli |
4.25% |
|
Catherine L Mann |
4.25% |
|
Huw Pill |
4.25% |
|
Dave Ramsden |
4.00% |
|
Alan Taylor |
4.00% |
Source: Bank of England
James Smith, developed markets economist, UK at ING, thinks that we could see a rare three-way split at tomorrow’s announcement.
“At least one official – Catherine Mann – is likely to vote for no change,” says Smith, adding that she could be joined by Huw Pill and Megan Greene.
“At the opposite end of the spectrum, arch-dove Swati Dhingra is likely to vote for a larger 50 basis point cut,” says Smith. “Fellow dove Alan Taylor might be tempted to join her, though he recently said he’d like to see three more cuts this year, which tends to suggest he’ll vote for 25bp moves at each meeting.”
Smith’s guess is that seven members will vote for a 25 basis point cut, with one “dissenter” voting in each alternative direction (for no change on the one hand, and a 50 basis point cut on the other).
UK’s weakening economy makes an interest rate cut more likely
While inflationary pressures are expected to subside, the UK economy is stagnating. Relatively high interest rates are exacerbating this.
The UK economy shrunk for the second consecutive month in May, while unemployment climbed to a four-year high.
“The economy is likely to face persistent headwinds,” says Michael Saunders, former MPC rate-setter and senior economic advisor at Oxford Economics. “Trade policy uncertainty remains high, deterring investment and hiring.”
With this in mind, Saunders expects that the MPC is likely to cut rates later this year, and again early next year. He anticipates that rates could even fall as low as 3.25% by mid-2026.
Why the inflation outlook could be key to MPC’s base rate decision
When the MPC sets interest rates, it looks forwards as well as backwards. The Bank of England’s inflation forecasts are a key input in its decision-making.
While June inflation’s jump to 3.6% was above the Bank’s forecast of 3.4%, it wasn’t substantially more than expected, and crucially it is in line with the Bank’s broader forecast that inflation will peak at 3.7% during Q3 this year (probably in September).
From then, inflation (which is measured year-over-year, so compares prices in any given month to the same month the previous year) is expected to fall.
Several inflationary shocks took place during the first half of 2025, especially Trump’s tariffs and increased payroll taxes and minimum wage levels that came into effect in April.
These are now, effectively, working their way through the system, but the MPC expects their impact to dwindle through the end of 2025 and first half of 2026. According to its latest Monetary Policy Report, the Bank expects inflation to fall to 2.4% by Q2 2026, and to 1.9% a year later.
“Importantly, the Bank of England’s previous forecasts show inflation rising over the course of this year before falling back,” says Laith Khalaf, head of investment analysis at AJ Bell. “So prices are currently evolving broadly in line with what the Bank has been expecting.”
For that reason, high levels of inflation are not – at present – enough of a concern for the MPC to deviate from its rate-cut cadence.
Inflation: the background to the MPC’s interest rates decision
Monetary policy is inextricably tied to inflation. The Bank of England (BoE) targets an inflation rate of 2%, which is widely regarded by economists as optimal for economic stability, and interest rate changes are the primary lever it can use to influence inflation.
The usual logic dictates that interest rates should be increased if inflation is running substantially above 2% or (importantly) if the BoE expects inflation to rise in the foreseeable future. In theory, this prompts people to spend less and save more, reducing demand for goods and services, and thereby slowing the pace of price increases.
Some might argue that, given inflation has risen to 3.6% in recent months, the MPC wouldn’t normally be thinking about cutting rates.
It might usually be expected to hold rates steady with inflation rising to its current level. In a strong, fast-growing economy, it might even be thinking about hiking rates, to prevent inflation accelerating.
But inflation is not the BoE’s only concern. It also has to consider the health of the economy – which is usually boosted by interest rate cuts.
For various reasons, which we will cover in detail here, experts think the BoE will err on the side of spurring economic growth rather than controlling inflation at tomorrow’s interest rates announcement.
“We’d expect the Bank to cut rates this month but offer very little in terms of forward guidance, besides reiterating its bias for further ‘gradual’ and ‘careful’ cuts,” says James Smith, developed markets economist, UK at ING.
The MPC’s interest rate cut cadence
Markets tend to like certainty. One way in which the MPC can foster this is by being as predictable as possible in its actions. Central bankers tend to avoid surprising markets as much as possible.
So far this year, the MPC has stuck to one 25 basis point cut per quarter. It has signalled that it intends to keep doing so.
“On a very simplistic measure of Bank behaviour, it’s time for a cut,” says Laith Khalaf, head of investment analysis at AJ Bell. “The Bank of England has been metronomic in its activity during this rate-cutting cycle, with base rate getting chopped back every three months since last August.
“This fits in with the ‘gradual and careful’ narrative expounded by the Bank. One year on from that first rate cut, the steady drum beat of the rate-cutting cycle demands another thump.”
Markets are pricing in a rate cut of 25 basis points, explains Khalaf. Anything besides this – either holding rates where they are, or cutting them by 50 basis points – would come as a shock and could provoke a backlash in the bond market.
Good afternoon, and welcome to our live coverage of the upcoming interest rates decision.
The Bank of England’s Monetary Policy Committee (MPC) announces its latest decision tomorrow (Thursday 7 August) at midday, and is generally expected to cut the headline rate by 25 basis points, to 4%.
That might seem unusual, given that inflation rose to 3.6% in June: well above the 2% inflation rate that the Bank of England targets.
We’ll go through the reasons why experts on the whole believe that the MPC will cut interest rates tomorrow in spite of persistent inflation, as well as explaining what an interest cut would mean for you and your money. Keep following our rolling coverage for all the details.
(Image credit: shomos uddin via Getty Images)