Bank of England Base rate reduced to 4.50% – what is it and how could it affect your debts?

The Bank of England announced on the 6^th of February 2025 that it would be reducing the Base rate from 4.75% to 4.5% This raises the question: what is the base rate and how might this affect your business?

What is the Bank of England Base Rate?

The Bank of England Base rate is essentially the interest rate at which commercial banks can borrow money from the government. Banks can lend out eye-watering amounts of money, and often, they will require government loans to do so. Similarly, when you take out a loan with a bank, banks need to pay interest back to The Bank of England when they are loaned money from them.

A higher Base rate, therefore, means banks are paying more interest, which will cut into their profit margins, so this increase is often passed on to their customers. This is a powerful tool the government can use to increase or decrease demand in the market; if borrowing is cheap, spending will increase, and if saving is lucrative, spending will decrease on a macro level.

How might this affect my business?

There are a few ways in which this might affect your business. Firstly, if you have a clause in your contract allowing you to charge interest on late payments, it may be variable based on the Base rate. For example, if your contract allows interest to be charged at 4% + Base, your effective interest rate today would be 8.75% (4% plus the Base rate of 4.5%).

This can be a smart move when agreeing contracts, as higher interest rates will generally increase the risk of default, and this compensates you for the increased risk. It is important to note that you will not be entitled to charge this amount for the entire duration of the debt.

To use the previous example, you could charge up to 8.50% on the balance from the 6^th of February onwards, when the rate changed, but this cannot be backdated. Calculating interest with Base rate changes can be tricky, and it is always advisable to speak to a professional.

Most business contracts benefit from the statutory interest rate as set out by the Late Payment of Commercial Debts (interest) Act 1998, which may allow you to charge interest at 8% + Base even if your contract does not deal with interest, but this does not apply in all cases, and you should be careful to get advice before relying on this.

In addition, base rate changes will likely affect your borrowing and saving interest rates. If you have a variable loan, the rate of interest you pay might increase when the Base rate rises, and fall when it goes down. Conversely, any savings accounts you might have may begin to pay more interest to you when the Base rate is higher.

These changes are not always reflected in the interest rates of commercial banks, but it is important to be aware of a potential increase in interest when the Base rate changes so you can budget and plan accordingly.

If you would like advice on including Base rate changes in your interest clauses, or help with outstanding debt interest, Nelsons’ experts would be happy to help.