When will interest rates be cut (and what does it mean for your business)?

UK businesses are looking ahead to potential interest rate cuts. Editorical credit: pcruciatti, via Shutterstock

For businesses up and down the land, recent years have been extremely tricky, to put it mildly. Massive ruptures like Brexit and the pandemic have changed not just the patterns of everyday operations, but also given rise to new regulations and new truths to adjust to.

These changes translate to squeezed balance sheets, greater uncertainty and more risk for the business that make up the heart of the British economy. Higher interest rates have been the cherry on top of an unappetising sundae that appears to grow stickier and less salvageable with each passing day.

At last, it seems the Bank of England (BoE) is getting ready to ease interest rates. Yet still the question of timing remains. So, when will interest rates be cut, and how quickly will they fall? This blog takes a look and pears ahead to ask what it all means for your business.

How quick is quicker?

For a multitude of reasons, policymakers have been reluctant to spell out the roadmap for interest rate cuts. For one thing, financial markets are prone to the kind of schoolyard gossip that can lead to volatility and rapid currency depreciation. Nobody needs to be reminded of recent examples of that sort of thing…

At its May meeting, the BoE’s governor, Andrew Bailey, gave his clearest indication yet of the timeline. Bailey said that both holding rates and reducing them at the June meeting was possible, although neither was a ‘fait accompli’.

So far, so ambiguous, right? Well, that sentence alone marks a significant change in tone. The BoE had previously bristled when asked if rates could come down as soon as June. Also significant was that two of the Bank’s Monetary Policy Committee (MPC) members voted to cut rates immediately.

As things stand, markets reckon there’s about a 50-50 chance of interest rates coming down in June. Lots can change in a short space of time, so no chickens are being counted just yet. However, the long and bumpy road to lower interest rates could soon be smoothing out.

Big brother is watching

Much of the recent media attention on interest rates has centred around the Federal Reserve and not the Bank. That’s because several leading economists have questioned the wisdom (or even the ability) of central banks loosening policy before the Fed has done so.

There is some sense to this argument. The Federal Reserve is by far and away the most important of the world’s central banks. The US dollar is the most widely held reserve currency, and due to this and a number of other technical factors, it’s customary for rate cycles to be led by the Fed.

The problem is that the US economy is running extremely hot. This has made Fed officials delay rate cuts just as inflationary forces recede in Europe. It now seems highly probable that the European Central Bank (ECB) and the Bank move before the Fed. There will be real scrutiny on how this goes if it does come to pass.

What do lower rates mean?

The Bank’s next move could have a significant impact on businesses with overseas exposures. Lowering rates would likely result in the pound falling against the US dollar, at least in the short term. As for GBP/EUR, that impact is less certain, particularly as the European Central Bank seem keen to get started with their own loosening cycle at a similar time.

Lower interest rates of course also mean cheaper borrowing for firms. This lower cost of capital can also make it easier to manage the books and relive strained cashflows. Equally, lower rates increase the likelihood that economic activity will rebound and companies return to growth.

The journey to lower rates is likely to result in large bouts of currency volatility. While it represents financial liberation in the medium term, for now businesses should be braced for the pound, euro and the US dollar to jump around at short notice. That’s why it’s never been more important to have sound financial planning in place to deal with this, and that’s where Smart Currency Business can help.

With 20 years of experience navigating currency markets, we know the importance of planning for the future. We’re here to insulate your margins and cash flow from risk and offer solutions based on your needs.

To make sure your upcoming transactions are protected against the risks of sudden market movements, call your Business Trader on 020 7898 0500 to discuss a forward contract; alternatively, if you’re new, please register with Smart Currency Business today.