After what likely felt like a lifetime to fatigued UK businesses and consumers, the Bank of England (BofE) announced yesterday that interest rates had finally been cut.
The five out of nine members of the central bank’s Monetary Policy Committee (MPC) voted in favour of reducing the rate, with four against in a meeting on 31 July. The rate had been held at 5.25% since 3 August 2023, and has not dropped to 5% since.
This will significantly ease the burden on British businesses and the general public, although the rate still remains higher than it was three years ago, when it stood at a mere 0.10%.
Rachel Reeves, Chancellor of the Exchequer, said: “While today’s cut in interest rates will be welcome news, millions of families are still facing higher mortgage rates after the mini-budget.
“That is why this government is taking the difficult decisions now to fix the foundations of our economy after years of low growth, so we can rebuild Britain and make every part of our country better off.”
The bank rate dictates how much interest banking customers pay on savings, how much mortgage holders pay monthly on house deposits, and how much both businesses and consumers pay on other loans.
Although only a small reduction, this will come as a huge relief to both of these groups. This will include the UK’s extensive financial services sector and the various payments firms which operate within it, particularly smaller enterprises and start-ups which may have depended on loans to get operations going.
Michael McGowan, Managing Director of Foreign Exchange, at Bibby Financial Services, told Payment Expert that this drop in interest rates will bring about renewed confidence in the UK market moving forward.
He said: “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.
“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.”
The news will also be welcome to the governing Labour Party, which campaigned heavily around a manifesto of business and growth during the late June and early July election trial.
For the economy as a whole, the news comes after the pre-election milestones of the UK achieving 0.6% economic growth – the first in years – and the reduction in inflation to 2%, the Bank of England’s ideal rate.