Kyle Eaton, money.co.uk business insurance expert, says:
“The base rate has been in the news a lot lately. Initially it was because the rate was rising – and rising at pace. Between December 2021 and August 2023 the Bank of England raised the base rate from 0.1% to 5.25% – the highest it had been since 2007, just before the financial crisis.
Since then, things had been looking slightly more optimistic. In August 2024 the Bank of England lowered the base rate to 5% – the first drop in years. But then inflation ticked up slightly – so in September 2024 the announcement came that the rate would hold at 5%, rather than continuing to drop as many hoped it might.
This means the cost to borrow remains higher, but the return on any savings is greater too, thanks to the higher base interest rate.
It’s rumoured that the base rate will drop again at the upcoming announcement in November. This would be welcome news – the lower the base rate the cheaper it is to borrow and the more consumers feel confident to spend – vital if your business relies on selling goods and services to people.
But as we saw in August – any rumoured drop is not certain.
But what does it all mean? Is a higher base rate all bad? And what does a higher or lower base rate mean for your business? Let’s start with the basics.
What is the base rate?
You might hear the base rate referred to by several other terms – the Bank Rate is one, the interest rate another.
Simply put, the Bank Rate is the UK’s base interest rate – which is set by the Bank of England. And that’s how we end up hearing different names for what is essentially the same thing. For ease, we’ll stick with referring to it as the base rate here.
The base rate influences all interest rates in the UK. It’s effectively a tool the Bank of England has in its toolkit to help fight inflation.
Inflation is a measure of the speed in which prices are rising. And that can be the price of anything – from groceries, energy bills and fuel to clothing and public transport.
When the prices of things go up and up, it’s bad news for everyone. This is why we often hear politicians say how important it is to keep inflation down. And this is where we see the base rate in action. As inflation began to rise dramatically in 2021/22, reaching a peak of 11% in 2022 – the Bank of England raised the base rate with it.
The higher the base rate, the more expensive it is to borrow money. And the more expensive it is to borrow, the less people spend. Consumer spending is precisely what fuels inflation – becoming a vicious circle as people try and spend more to receive the same. By curbing spending, prices come down quicker and so does inflation.
And that’s what we’ve been seeing – after a period of a higher base rate, inflation is now back at 2.2%.
How does a higher or lower base rate affect my business?
There’s no denying the higher the base rate, the more difficult it is for businesses to trade. By definition, a high base rate is in place to curb spending. And most businesses need consumers to be spending.
It also makes it more expensive to borrow. Many businesses rely on some form of borrowing, especially in the early days, to help with month-to-month cash flow. A higher base rate makes options like business loans more expensive.
So if consumers are spending less and it’s more expensive to borrow – it’s fair to say it makes for especially difficult trading conditions.
But it’s not all bad news.
A higher base rate means a greater return on savings. When the base rate was at 5.25%, some business savings account providers were offering interest rates just as high. So any money your business doesn’t need right away can go further as it earns interest at a higher rate.
Even now, with the base rate at 5%, business savings providers like Tide are offering competitive interest rates at 4.33% AER. Though you should act fast – as the base rate falls, so will the return on your business’ savings. This is because the interest rates which banks offer will fall in-line with the base rate.
Tips on responding to base rate changes
Predicting whether inflation will rise (and the base rate with it) is difficult. Global events which typically drive rising costs often happen without warning – pandemics and wars are two recent examples.
The immediate outlook suggests the base rate will continue to fall in the coming months. But that’s not a guarantee. So here are five tips to help you best prepare for base rate changes.
Review your business finances
If you have any variable rate loans or lines of credit you might want to consider refinancing to a fixed rate. A fixed rate means any interest you owe won’t change in the event of the base rate rising, meaning you can better predict and manage monthly outgoings.
Negotiate contracts
As the base rate (hopefully) drops further, it can be a good opportunity to negotiate more favourable terms with any suppliers or providers. Perhaps you can lock in longer-term contracts – typically a win-win for both parties. Contract negotiations extend to energy providers too – like with finance, a fixed-rate on your energy bill can mean you aren’t stung with soaring bills when energy costs rise.
Don’t wait on savings rates
The higher the base rate, the more of a return you’ll get on your business savings. Don’t sit on this though – as the rate lowers, providers won’t hesitate to reduce savings rates with it. And if you can afford to put the money away for a fixed term you’ll likely get a better rate too, and one that won’t change for the length of the term you agree – regardless of what the base rate does.
Look at your prices
If rising costs are directly impacting your operating costs, you may want to consider price increases. This is a delicate balance – you don’t want to go too high and put extra pressure on your customers who are already struggling. But carefully communicated, modest price rises to protect margins can be the difference between success and failure during challenging times.
Find ways to better manage cash flow
The more that cash flows, the better equipped your business is to deal with rising inflation and higher interest rates. Consider improving efficiencies when it comes to sending and chasing invoices and put off large purchases if they aren’t absolutely necessary.
When is the Bank of England’s next announcement?
In September, it was announced the base rate would hold at 5%. This decision is made by the Monetary Policy Committee (MPC), a group of nine people who on this occasion voted 8-1 in favour of holding the rate at 5%.
The next announcement is expected on Thursday 7 November. It’s at this time the MPC will consider the state of the UK economy alongside a range of factors including how fast prices are rising (if at all), how the UK economy is growing and how many people are in work.
The base rate had been at 5.25% for much of this year, seeing its first drop in August 2024. So it’s difficult to predict what the outcome of the next meeting will be – though recently Andrew Bailey, the governor of the Bank of England, suggested interest rates could fall more quickly if spending remains under control.
In any event it’s important to keep a close eye on developments so you can best protect your business.”
