Interest rate reduction – what this means for commercial finance
As commercial finance brokers, our team closely monitor interest rates in the financial markets and the impact on terms available for our clients through working alongside lenders to discern any expected shift in rates or upcoming changes to product ranges. At the start of the month, the cut in interest rates was a decision largely anticipated by the financial market, closely following the US Federal Reserve opting to hold rates steady.
0.25 % cut to interest rates
In a recent report, the Bank of England’s chief economist, Huw Pill, warned he felt the quarter-point reduction earlier in the month to 4.25% was too soon. He voted against the quarter-point reduction earlier this month based on what he saw in terms of inflationary persistence. He added:
“My starting point is that the pace of bank rate reduction should be ‘cautious’, running slower than the 25bp per quarter we have implemented since last August.”
Pill’s caution has been borne out with figures released this week indicating inflation jumped 3.5% in the year to April. Continuing hikes in energy costs have driven this increase, along with council tax rises and jumps in household bills. While some economists were surprised at the hike, the Bank of England has previously stated it expects inflation to peak at around 3.7 per cent between July and September before dropping back to the 2% target.
Morgan Stanley analysts have suggested the UK economy will continue to struggle, forcing the Bank of England to act and cut rates more aggressively, predicting 3.25 % by the end of this year. The financial services firm argues that lower GDP growth, exacerbated by a reduction in household disposable income, will be contributing factors. This is against recent HSBC commentary quoting “there are some green shoots of positivity that would help to cushion the impact of heightened uncertainty, supported by a gradual fall in interest rates, maintaining their view Bank Rate will end 2025 at 3.75%.
What does this all mean for the commercial finance sector?
In our experience, the interest rate reduction has been reflected in the lending market, but this tends to be incremental only. It’s also worth looking at changes against term rate fluctuations over the SONIA rate in the last 5 years. SONIA (Sterling Overnight Index Average) is a widely used interest rate benchmark in the UK, it’s essentially the interest rate banks pay to borrow money overnight, calculated daily and published by the Bank of England.
As of 23rd May, the SONIA rate (Sterling Overnight Index Average) sits at 4.21%. This rate is higher than the long-term average of 2.80%, peaking at 5.20% last year. There have been various fluctuations over the recent months with both global and domestic impacts to short and medium term views, 5 year-SONIA seeing significant fluctuations even in the last few weeks, leading any real prediction hard to make.
Our team works closely with established lenders, many of whom utilise a desk at the Omega offices, to ensure discussions on terms and products available are accurate and allowing us to best advise our clients and introducing partners on the most appropriate terms available.
Terms available:
Competitive terms for commercial investment made up of; mixed industrial, wholesale and warehouse
Debt requirement: £600,000
Interest Rate: 1.83% over cost of funds
Lender Fee: 1.5% added to the loan amount
Please contact us if you wish to discuss the rates available.
