Bank of England Keeps Rates at 3.75% as Corporate Debt Levels Influence Business Sensitivity

The Bank of England has maintained interest rates at 3.75%, with corporate debt levels affecting how sensitive businesses are to interest rate changes. Highly leveraged companies respond more strongly to rate adjustments.
The monetary policy committee’s 5-4 vote considered how corporate balance sheets have evolved. Companies that borrowed heavily during the pandemic at low rates now face refinancing at higher rates. Even with six cuts since mid-2024, rates remain well above pandemic-era levels.
Corporate debt sensitivity creates amplified policy transmission. For highly leveraged businesses, rate changes significantly affect debt servicing costs and therefore investment and employment decisions. This could make the current 3.75% rate more restrictive than it appears, contributing to weak growth forecasts.
However, many large corporations secured long-term fixed-rate debt during the low-rate period and aren’t immediately affected by current rates. This creates uneven effects—small and medium businesses with variable-rate debt feel rate changes acutely, while large corporations with fixed-rate bonds don’t.
Governor Bailey’s projection that inflation will fall to around 2% by spring partly depends on businesses not passing through excessive wage or cost increases to prices. Corporate debt burdens might actually help control inflation by constraining companies’ ability to raise wages aggressively. The GDP forecast of 0.9% reflects partly debt service costs weighing on business investment. Unemployment rising to 5.3% could partly reflect businesses with high debt burdens cutting costs. Chancellor Reeves’s budget measures, including utility bill cuts and rail fare freezes from April, reduce business costs particularly in service sectors. Inflation at 2.1% by mid-2026 assumes corporate debt doesn’t trigger widespread financial distress.