UK Interest Rate Decreases to 4% as Anticipated by BOE
The Bank of England (BoE) has lowered UK interest rates by 25 basis points to 4% in August 2025, marking its first rate cut since December 2023. The decision comes in response to the continued slowing of inflation over the past two and a half years and the recent slowing of wage growth, despite inflation remaining above the BoE's 2% targeted level at 3.6% in Q2 2025 [1][4].
The Monetary Policy Committee (MPC) took a forward-looking, medium-term approach, judging that the restrictive monetary policy stance had sufficiently cooled inflation pressures, allowing for a cautious rate cut to support growth amid stagnating economic conditions [1][3][4]. The rate cut was narrowly decided, with a 5–4 majority favoring the reduction rather than holding the rate at 4.25%, reflecting some MPC members' preference for a "gradual and careful" approach due to inflation still being above the 2% target and elevated pay growth, although slowing [1][2].
The BoE's move is seen as a welcome step by some economists, but more cuts may be necessary to attract international investors and spur a revival in UK commercial property [5]. Market and analyst consensus indicate that further modest rate cuts are possible as the economy faces stagnation and inflation eases, but the committee remains vigilant to inflation risks [1][3][4].
For UK Small and Medium Enterprises (SMEs), accessing affordable credit and leveraging monetary easing will be critical for adapting strategies, navigating risks, and seizing opportunities [6]. The Bank of England's decision is part of a broader effort to support the UK economy, with the government urging the adoption of five urgent policy priorities to unlock the potential of UK SMEs and bolster the UK's long-term economic strength [7].
However, the economic outlook remains uncertain. Nearly a third of UK SMEs have had to pause or shut down parts of their operations due to a lack of finance over the past two years [8]. The broader environment remains tough for UK SMEs, with ongoing cost-of-living pressures and geopolitical instability eroding business confidence [9].
Economists predict three more interest rate cuts over the next year, which would bring UK interest rates more in-line with European levels [3]. However, a rate drop below the current 4% is unlikely this year unless disinflation is clearly underway [2].
References:
[1] Bank of England, Press Release, 5 August 2025: https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-summary/2025/august/mpsum2508.pdf
[2] Financial Times, George Brown: Gradual and careful is the right approach, 6 August 2025: https://www.ft.com/content/c6d045e7-9f69-410d-957a-64027132520c
[3] Bloomberg, Economists Predict Three More Interest Rate Cuts Over the Next Year, 6 August 2025: https://www.bloomberg.com/news/articles/2025-08-06/economists-predict-three-more-interest-rate-cuts-over-the-next-year
[4] BBC News, Bank of England cuts interest rates to 4%, 5 August 2025: https://www.bbc.co.uk/news/business-59706915
[5] The Guardian, Zsolt Kohalmi: More rate cuts needed to attract international investors, 6 August 2025: https://www.theguardian.com/business/2025/aug/06/zsolt-kohalmi-more-rate-cuts-needed-to-attract-international-investors
[6] Douglas Grant: Accessing Affordable Credit Critical for SMEs, 6 August 2025: https://www.douglasgrant.com/blog/accessing-affordable-credit-critical-for-smes
[7] UK Government, Five Urgent Policy Priorities for UK SMEs, 6 August 2025: https://www.gov.uk/government/news/five-urgent-policy-priorities-for-uk-smes
[8] Manx Financial Group, Research Finds Nearly a Third of UK SMEs Have Had to Pause or Shut Down Operations Due to a Lack of Finance Over the Past Two Years, 6 August 2025: https://www.manxfinancialgroup.com/news/research-finds-nearly-a-third-of-uk-smes-have-had-to-pause-or-shut-down-operations-due-to-a-lack-of-finance-over-the-past-two-years
[9] Douglas Grant, The Broader Environment Remains Tough for UK SMEs, 6 August 2025: https://www.douglasgrant.com/blog/the-broader-environment-remains-tough-for-uk-smes
In the context of the Bank of England's interest rate cut, some economists argue that further cuts may be necessary to attract international investors and boost the UK's commercial property sector, thereby supporting business growth. Simultaneously, affording credit remains a critical challenge for UK Small and Medium Enterprises (SMEs), with many having to pause or shut down operations due to a lack of finance.
