Reductions in Interest Rates Could Potentially Spur Economic Growth, According to Businesses' Feedback to the Bank of England

Getting the UK Economy Back on Track

What do business leaders say about further interest rate cuts by the Bank of England? It could be a game-changer for consumer spending and the economy in the coming months, given the nation's economic growth of 0.7 per cent in the first quarter of the year.

The experts at the Confederation of British Industry (CBI) and the Institute of Directors (IoD) believe that a lowering in the cost of borrowing would continue the UK economy's high-growth run during the latter parts of the year, even amid global trade turmoil and higher taxes.

Ben Jones at the CBI predicts an uptick in inflation and a cooling labor market to slow down real household income growth. However, he thinks lower interest rates should encourage consumers to save less and spend more. Similarly, the IoD's Anna Leach suggests that strong growth at the beginning of the year is "unlikely" to hold due to an expected drop in business and consumer spending.

The tariff turmoil and its impacts on consumer and investment spending may push down activity in the coming months, as it delays decision-making and increases the desire for precautionary saving buffers, according to Leach.

Wait for it... Interest Rate Cuts May Not be a Done Deal

Despite the expectation of further interest rate cuts, these may not take effect as soon as anticipated. Consumer spending may not slow down as much as expected, but employment taxes, which came into effect in April, could hold back growth hopes.

While consumer spending is likely to continue benefiting from real earnings growth and further falls in interest rates, the labor market is softening rapidly due to increased employment costs, Leach states.

However, the Bank of England's policy makers have struck a particularly hawkish tone regarding accelerating interest rate cuts in the coming months. Deputy governor Clare Lombardelli argues that high wage growth, currently standing at 5.6 per cent, is "too high" to bring inflation down to the Bank's two per cent target.

External members Megan Greene and Catherine Mann highlight high price growth expectations and market volatility as pressures to watch out for before making further interest rate cuts. Before the Bank of England's meeting last week, markets had penciled in four interest rate cuts, but analysts now believe that as few as two cuts could be made given the Bank's cautious approach to managing inflation.

Inside Scoop: What's Behind the BoE's Decisions

In May 2025, the Bank of England reduced its Bank Rate from 4.5% to 4.25%, marking a gradual easing from the peak rates set since late 2021. The Monetary Policy Committee (MPC) voted narrowly, reflecting some internal uncertainty, indicating a cautious approach.

The bank's policy remains forward-looking, aiming to sustain growth and employment while meeting the 2% inflation target. Its goal is to maintain a delicate balance between ongoing inflation control and supporting the economy amid challenges like global trade turmoil and higher domestic taxes.

Elevated household inflation expectations, however, could moderate consumer confidence and spending despite rate cuts. In addition, international trade uncertainty and increased tax burdens restrict disposable incomes and business confidence, limiting the stimulative impact of rate cuts. Therefore, monetary policy easing alone may not fully offset these negative influences, emphasize economists.

In summary, economists view further Bank of England interest rate cuts as a measured effort that may provide relief to consumer spending by lowering borrowing costs but expect the overall UK economy to face significant constraints from global trade tensions and higher taxation. The stimulative effect of rate cuts is likely to be moderate and gradual, with the BoE carefully balancing inflation risks against economic needs amid ongoing uncertainties.

In the context of efforts to revitalize the UK economy, both business leaders and financial experts have suggested that lower interest rates could continue the high-growth trend, despite global trade turmoil and increased taxes. However, economists caution that the stimulative effect of these rate cuts might be moderated by factors such as elevated household inflation expectations, international trade uncertainty, and increased tax burdens.

Furthermore, despite the anticipated interest rate cuts, there exists internal debate within the Bank of England's Monetary Policy Committee, as external factors like high wage growth and market volatility are pressuring the bank to exercise caution in managing inflation. This cautious approach could potentially result in fewer interest rate cuts than initially anticipated.

Reductions in Interest Rates Could Potentially Spur Economic Growth, According to Businesses' Feedback to the Bank of England