One of the most damaging aspects of the recent economic turmoil has been the drying up of business investment. Foreign investors have looked at the UK—with its high inflation, flat growth, and political uncertainty—and taken their money elsewhere. The Bank of England hopes that cutting rates to 3.75% will be the signal that brings them back.
Lower rates reduce the “hurdle rate” for investment. Projects that looked unprofitable when borrowing cost 5% might look attractive at 3.75%. The Chancellor’s boast about the “fastest pace of cuts” is a marketing pitch to global capital: “Britain is open for business again.”
However, investors hate uncertainty, and the 5-4 split vote screams uncertainty. The IMF’s “highest inflation in G7” tag is also a major deterrent. Why invest in the UK when the US or Germany looks more stable?
The “National Insurance shock” mentioned in the Bank’s report also hurts. It acts as a tax on investment in jobs. The rate cut is a carrot, but the tax hike is a stick. Investors are weighing them up.
If business investment doesn’t return in 2026, the UK’s long-term productivity will continue to decline. We will be a low-growth, low-wage economy. The rate cut is a necessary condition for investment, but it is not sufficient on its own.
