A few weeks ago, the outlook for small business borrowing costs looked encouraging.
Markets were pricing in an 86 per cent chance of a Bank of England rate cut at the March meeting, with further reductions expected through the year. Business owners who had been waiting to refinance loans, take on new premises or invest in equipment had good reason to feel that relief was on its way.
That optimism has evaporated with remarkable speed. Military escalation between the United States and Iran, drone strikes on Gulf energy infrastructure and the spectre of a wider regional conflict have sent gas prices climbing, gilt yields rising and inflation expectations surging. Within days, the probability of a March rate cut collapsed to less than five per cent. The chance of a move in April is now below even odds.
For small businesses, this is not an abstract macroeconomic story. It is the difference between an affordable loan and an unaffordable one, between expanding and standing still, between managing cash flow and scrambling to cover interest payments.
The Bank of England held its base rate at 3.75 per cent at the March meeting, and the Monetary Policy Committee’s language offered little comfort to those hoping for swift easing. The direction of travel, the Bank indicated, now depends less on domestic economic data and more on developments in the Middle East. If tensions subside and energy prices retreat, the easing cycle could resume. But if the conflict deepens or spreads, expectations of multiple rate cuts in 2026 may quickly disappear.
New survey data from the Bank suggests that businesses themselves are already adjusting their expectations. Firms now anticipate inflation reaching 3.5 per cent over the next twelve months, up from three per cent previously and the highest year-ahead forecast since late 2023. Most now believe there will be at most one rate cut in the next twelve months.
For the 1.8 million mortgage holders facing renewals in 2026, many of them small business owners whose personal and commercial finances are intertwined, the shift is particularly unwelcome. Fixed-rate deals that were beginning to edge downward have stalled or reversed, and lenders are repricing products to reflect the changed outlook.
The practical advice for small business owners is to avoid planning around rate cuts that may not materialise. Anyone sitting on a variable-rate loan or approaching the end of a fixed term should consider locking in now rather than gambling on cheaper rates arriving later in the year. Cash flow forecasts built on the assumption of falling borrowing costs need revisiting.
For businesses that were planning capital investment contingent on cheaper finance, the calculation has changed. That does not necessarily mean shelving plans altogether, but it does mean stress-testing them against a scenario where rates stay at or near current levels for the remainder of the year.
