Interest rates matter more than the Autumn Budget

Two dates dominate the UK economic calendar in the run up to Christmas. These are 26 November, the day Chancellor Rachel Reeves delivers the Autumn Budget, and 18 December, when the Bank of England holds its final policy meeting of 2025. Both events could have a significant impact on the outlook for business and investing. But, when it comes to unlocking value in UK companies, it is the interest rate decision that is likely to have the most meaningful impact. 

A turning point for monetary policy

The Bank of England held UK interest rates at 4% in November, but the decision was finely balanced. Four members of the nine-strong Monetary Policy Committee voted for an immediate cut to 3.75%, with Governor Andrew Bailey indicating that monetary policy was “past peak restrictiveness”. 

Inflation, as measured by the consumer price index (CPI), has now eased to 3.8% and wage growth is starting to cool, but the UK economy barely registered a flicker of life in the third quarter, with gross domestic product rising just 0.1%. Markets now expect the Bank of England to act, with a 25-basis-point (bp) cut pencilled in for December that will herald the start of a period of monetary easing.

This is a pivotal point for British business. In a lower interest rate environment, the value of assets is generally higher because lower discount rates – which are used to convert future money into today’s terms – can be applied. 

The discount rate reflects the cost of capital and prevailing interest rates. Higher discount rates mean future cash flows are worth less today; lower rates mean they’re worth more. This effect can lift share prices and make it easier for companies to raise equity capital.

Lower interest rates have many benefits for a business. These include:

• Cheaper borrowing costs: lower interest expenses on existing and new debt frees up capital for investment in future growth.
• Improved investment returns: lower rates make financing capital projects more attractive because the hurdle rate for returns falls. An investment that may have been marginal when rates were higher now looks justified.
• Higher consumer demand: lower rates often lead to cheaper mortgages and personal loans, boosting household spending.
• An improvement in financial metrics: companies can refinance existing debt at lower rates, reducing long-term interest obligations. This improves balance sheet strength and credit ratings.
• Currency effects: lower rates can weaken the domestic currency, making exports more competitive.

For companies across the spectrum – from FTSE 100 giants to unlisted minnows – the cost of capital is a critical determinant of investment and growth.

Monetary policy trumps fiscal tweaks

The Autumn Budget will dominate headlines next week, but its likely measures – tax rises to plug a £20bn-£50bn fiscal hole, tweaks to allowances, and modest reliefs for retail and hospitality – are unlikely to transform the outlook for UK corporates. 

Business rates reform and late-payment crackdowns may help at the margin, but the overall tone is one of fiscal tightening. Ms Reeves has signalled “hard choices” and warned that “each of us must do our bit” – which is code for higher taxes. For companies already squeezed by higher costs following a period of elevated inflation, it will barely make an impact.

Contrast that with the impact of cheaper money. Lower rates can ripple through balance sheets and consumer behaviour. They reduce debt servicing costs, free up cash for investment and improve the spread between return on capital and cost of capital. They also lift consumer confidence, which matters for domestically focused companies in retail, construction and leisure.

UK shares have been priced at a persistent discount for years, which is partly due to sector composition, with more energy, financials, and commodities and limited exposure to high-growth tech sectors. While these structural issues explain why UK equities trade at a discount, lower interest rates can still raise valuations by improving earnings outlooks, reducing discount rates, and attracting capital flows. These effects are unlikely to eliminate the discount relative to other global indices entirely, but they may trigger a meaningful re-rating.

Global context matters too. The European Central Bank is leaning dovish (favouring lower interest rates), and the Federal Reserve has slowed its quantitative tightening. If the UK clings to restrictive settings while others pivot, it risks falling out of sync, adding currency volatility to the mix.

None of this aims to dismiss the Autumn Budget as unimportant or irrelevant – that is far from being the case. But the measures deemed politically necessary – tax hikes, property levies, and threshold freezes – will likely dampen household spending and business confidence. For corporates, uncertainty over tax policy is itself a brake on investment. 

The Autumn Budget will set the fiscal tone, but for unlocking value in UK companies, the Bank of England’s December decision is the real inflection point. A 25bp cut may sound modest, yet its signalling power is profound: inflation is yesterday’s fight, growth is today’s challenge. For investors, that pivot could mark the start of a long-overdue reappraisal of UK equities in 2026 and beyond.