As the Bank of England cuts rates to 3.75%, a war of words is brewing between the business community and the government over the causes of the UK’s economic stagnation. While the rate cut is intended to spur growth, business groups are pointing fingers at Chancellor Rachel Reeves’s recent budget, specifically the £25bn increase in employer national insurance contributions (NICs).
The Bank of England’s latest report acknowledged these concerns, categorizing the NICs rise as one of the “one-off shocks” that has restrained the fall of inflation. By increasing the cost of employment, businesses argue they have been forced to freeze hiring and investment, contributing to the 0.1% contraction in GDP seen in October. This “brake” on the economy was a key factor discussed by the Monetary Policy Committee.
Despite this friction, the Chancellor hailed the rate cut as a validation of her economic management. She claimed the reduction would make it cheaper for companies to borrow and invest, counteracting the gloom. “That’s the fastest pace of cuts in 17 years,” Reeves noted, attempting to shift the narrative toward recovery and the easing of borrowing costs for businesses with loans.
However, the data paints a picture of a fragile corporate landscape. Bank agents reported that while inflation is falling, employers are still expecting to have to raise wages by 3.5% next year to retain staff. This pressure, combined with higher tax bills, leaves many businesses with squeezed margins. The two external MPC members who voted for the cut specifically cited weak investment and a slowdown in the labor market as reasons to lower rates immediately.
The coming months will be a test of resilience for UK businesses. They must navigate a landscape of slightly lower borrowing costs but significantly higher tax burdens. If the rate cut fails to offset the impact of the NICs hike, the flat growth predicted for the end of 2025 could easily slide into a prolonged recession in 2026.