Summary
This blog explains how the Bank of England’s August 2025 interest-rate cut impacts cost of capital, refinancing, working-capital strategy, and FX exposure for scale-ups. It highlights the decisions CFOs need to prioritise now, offering actionable steps for capital structure optimisation, liquidity planning, scenario modelling, and strategic financial resilience.
Introduction
The Bank of England’s August 2025 rate cut has shifted expectations across debt markets, capital planning, and corporate financing. While lower rates ease borrowing costs, they also reshape currency dynamics, refinancing opportunities, and investment assumptions. CFOs now must reassess capital allocation, working capital, and risk exposure in this new environment.
What Has Changed After the Bank of England Cut Rates to 4% in August 2025?
On 6 August 2025, the Bank of England’s Monetary Policy Committee (MPC) voted 5–4 to cut the Bank Rate from 4.25% to 4.00%, marking the first rate cut of this monetary cycle. The BoE cited “substantial disinflation over the past two years” as justification for easing, while warning that underlying price and wage pressures still required vigilance. This cut marked a shift in policy, but one that the MPC signalled would be gradual, not aggressive. Unlike past cycles, the Bank did not indicate a fast path to significantly lower rates.
Why did the Bank of England reduce rates to 4%?
- UK inflation reduced substantially from its 2022 peaks, falling to around 3.5% in mid-2025.
- Wages and services inflation remained elevated, but overall inflation momentum softened enough to justify modest easing.
How does this affect expectations for 2026–2027?
- Market pricing shows cautious expectations, with some traders forecasting an additional cut in early 2026, though uncertainty remains high.
- Reuters noted that “investors trimmed expectations for rapid or deep cuts,” underscoring restrained market sentiment.
What macro indicators should CFOs monitor now?
- Wage inflation: still a key driver of services inflation.
- Energy prices: geopolitical tensions keep volatility high.
- Gilt yields: a leading indicator for borrowing costs.
- GBP strength: influenced by relative interest-rate differentials.
Takeaway for CFOs:
This is a turning point, but not a guarantee of cheap money. A recalibration of financial strategy is essential.
How Do Lower Interest Rates Affect the Cost of Capital?
While the Bank Rate influences borrowing costs, the weighted average cost of capital (WACC) also depends on risk premiums, equity expectations, leverage, and credit spreads. A lower base rate does not automatically lead to a materially lower WACC.
Do lower base rates automatically reduce WACC?
Not always.
- Cost of debt may fall, but lenders often adjust credit spreads based on risk conditions.
- Cost of equity depends on market volatility, growth expectations, and investor sentiment, not the BoE rate alone.
- As leverage increases, levered beta rises (corporate-finance principle), potentially increasing cost of equity.
Which components of WACC change most in a lower-rate environment?
- Risk-free rate: decreases quickly in response to Bank Rate movements.
- Cost of debt: may fall depending on spreads, credit conditions, and banking appetite.
- Cost of equity: slower to adjust; still influenced by risk-adjusted market returns.
How should CFOs recalculate hurdle rates?
- Rebase hurdle rates using the new risk-free rate (e.g., gilt yields).
- Add updated credit spreads or risk premiums.
- Run sensitivity analysis to understand how valuation changes under rate volatility.
- Adjust DCF models, particularly for long-duration investment projects.
Key insight:
Lower rates create opportunity, but WACC can only be optimised with deliberate recalculation, not assumption.
Should CFOs Refinance Existing Debt Now or Wait?
The August 2025 rate cut has opened a potential refinancing window, but it is not universally advantageous. CFOs must conduct a facility-by-facility evaluation.
What determines whether refinancing makes sense?
- Remaining term: short-dated facilities (e.g., RCFs) reprice faster.
- Debt type: term loans vs asset finance vs convertible notes have varying refinancing flexibility.
- Break costs: many loans include prepayment penalties or hedging unwind fees.
How does lender appetite differ across financial institutions?
- Traditional banks: cautious, with tighter credit screens and higher emphasis on covenant strength.
- Private credit funds: flexible but more expensive, with yields often higher than bank debt.
- Specialist lenders (e.g., asset finance): more competitive for equipment or receivables-backed lending.
Common refinancing mistakes
- Focusing only on the headline rate and ignoring debt covenants.
- Underestimating refinancing risk, especially if depending heavily on floating-rate debt.
- Refinancing without aligning debt structure to the company’s medium-term strategy.
Action step:
Before refinancing, CFOs should complete a formal debt audit including amortisation profiles, covenants, prepayment terms, leverage ratios, and debt-service coverage.
How Should CFOs Approach Debt Mix & Capital Structure in 2025?
The 2025 rate environment presents an opportunity to optimise capital structure, but only within well-managed leverage thresholds.
What is the ideal debt-to-equity ratio now?
There is no universal ideal. It varies by:
- Industry volatility
- Stage of growth
- Cash flow predictability
- Asset base and collateral
Corporate finance theory (trade-off theory) states that firms balance debt tax benefits against the risk of distress. Conservative leverage is advisable for scale-ups still maturing.
Should CFOs lock in longer-term debt now?
- Companies with predictable, recurring revenues (e.g., SaaS) may benefit from fixed, long-dated debt.
- More cyclical firms may prefer shorter duration or variable-rate facilities for flexibility.
How to avoid over-leveraging during optimism
- Conduct multi-scenario stress tests: revenue declines, margin compression, rate volatility.
- Maintain sufficient liquidity reserves.
- Avoid increasing leverage solely because rates have fallen.
Takeaway:
A rate cut is a strategic moment to review leverage, not a reason to overextend.
What Working-Capital Strategies Should CFOs Revisit in a Low-Rate Environment?
Although financing becomes cheaper, working capital remains the lowest-risk liquidity source. Strengthening cash conversion cycles is essential.
Why is cash conversion still critical?
- Liquidity protects against external shocks, still likely in 2025–2026.
- Dependence on external financing exposes companies to credit tightening.
- Strong working-capital discipline increases free cash flow and resilience.
Working-capital levers with highest impact
- Receivables: automate invoicing; tighten credit control; offer early-payment incentives.
- Payables: negotiate extended terms with strategic suppliers.
- Inventory: reduce slow-moving stock; improve forecasting through demand planning tools.
- Treasury: invest surplus cash in short-dated, liquid instruments aligned with cash-flow needs.
Treasury adjustments in volatile rate conditions
- Prefer short-duration instruments to preserve optionality.
- Maintain liquidity buffers, avoiding long-dated lockups.
- Align cash-sweep strategies to real-time operational cycles.
How Do 2025 Rate Cuts Influence FX Risk for UK Scale-Ups?
Lower interest rates often place downward pressure on GBP, influencing firms with cross-border exposure.
Why does GBP weaken after rate cuts?
- Lower yields reduce the attractiveness of sterling assets.
- International capital flows shift toward higher-yield economies.
- FX markets price interest-rate differentials quickly.
Which firms face the highest FX exposure?
- Import-heavy sectors (manufacturing, e-commerce).
- SaaS companies billing in USD/EUR but reporting in GBP.
- Firms with foreign-currency denominated debt.
What hedging tools should CFOs consider?
- Forward contracts: lock exchange rates for future payments.
- Options: flexible protection with defined downside risk.
- Natural hedges: match currency of revenue and costs.
Bottom line:
Lower rates do not eliminate FX volatility; hedging becomes more important.
How Should CFOs Reassess Investment Decisions & Capex with Lower Rates?
The cost of capital may fall modestly, making some investments more viable, but CFOs must maintain rigor.
Should hurdle rates change?
Yes, but only after recalculating WACC using:
- New risk-free rate
- Updated credit spreads
- Revised equity risk premiums
How do lower rates impact ROI/payback?
- Discounted cash flows increase, raising NPVs.
- Lower discount rates may shorten payback periods, particularly for long-term or infrastructure-type projects.
Investment areas gaining attractiveness in 2025
- Automation: reduces operating costs amid wage pressures.
- Recurring-revenue models: capital-efficient scaling.
- International expansion: supported by lower funding costs.
Guidance:
Don’t loosen investment discipline, tighten it.
How Can Scenario Planning Help CFOs Prepare for 2026 Market Uncertainty?
With global uncertainty still elevated, scenario modelling is now essential, not optional.
Post-cut scenarios CFOs should model
- Base case: Bank Rate remains near 4%, inflation gradually eases.
- Optimistic case: second BoE cut in early 2026.
- Downside risk: global supply-chain shocks or wage inflation push rates higher again.
How often to update?
- Quarterly
- After BoE announcements
- Following geopolitical or commodity shocks
Key metrics in scenario modelling
- Free cash flow (FCF)
- Interest coverage
- Debt-service capacity
- Covenant headroom
- Liquidity runway
Scenario planning allows CFOs to act proactively rather than respond reactively.
What Capital-Market Risks Should CFOs Monitor Through 2026?
Despite easing, conditions remain fragile.
Persistent inflation/wage pressures
- Labour shortages continue in key UK sectors.
- Services inflation remains sticky.
Geopolitical risks
- US-China tensions
- Middle East disruptions affecting energy
- EU regulatory changes impacting trade
Signals of credit tightening to watch
- Widening corporate credit spreads
- Decline in bank lending appetite
- Falling gilt yields signalling risk aversion
CFOs should assume volatility remains elevated, even in a lower-rate environment.
How Can a Capital-Structure Health Check Strengthen CFO Decisions in 2025?
A capital-structure health check is the most efficient way to align strategy with the new rate landscape.
What it includes
- Debt diagnostics: interest terms, covenants, break clauses
- Liquidity forecasting: 12–24 month cash-flow projections
- FX exposure mapping
- Covenant stress tests
- Working-capital review
Expected outcomes
- Lower cost of capital through facility optimisation
- Reduced risk from FX or refinancing exposure
- Stronger lender/investor confidence
- Enhanced financial resilience
Best timing
- During monetary policy inflection points (like now)
- Ahead of refinancing or fundraising
- During annual budgeting cycles
How Rate Cuts Affect Key CFO Decisions
| CFO Area | Impact of 2025 Rate Cut | Recommended Action |
| Debt Refinancing | Lower base rate but uncertain spreads | Review early refinancing windows |
| Cost of Capital | Slight decline in WACC | Recalculate hurdle rates |
| FX Exposure | GBP may weaken | Set or reinforce hedging policy |
| Working Capital | Liquidity advantage persists | Tighten receivables/payables cycles |
| Capex Decisions | Higher NPVs | Prioritise high-return, long-duration projects |
Conclusion
The August 2025 rate cut marks an important moment for CFOs, but not a return to the ultra-low-rate era of the 2010s. Instead, it represents a carefully calibrated shift in monetary policy that requires equally careful recalibration inside scale-ups.
Forward-thinking CFOs will:
- Optimise capital structure
- Strengthen liquidity
- Reassess FX exposure
- Improve working-capital cycles
- Update hurdle rates
- Stress-test refinancing plans
A structured capital-structure health check is the most effective way to capture opportunities while managing risks in the new interest-rate landscape. If you want expert support assessing refinancing opportunities, strengthening liquidity planning, or revising capital structure for 2026, request a Capital-Structure Health Check from OD Accountants. Turn macroeconomic shifts into strategic advantage.
Frequently Asked Questions
Will interest rates fall further in 2026?
Possibly, but not guaranteed. The BoE has signalled a cautious approach and will adjust policy depending on inflation and wage conditions.
Should CFOs fix or float debt now?
Fixed debt offers stability; floating offers flexibility. The optimal choice depends on cash-flow predictability and risk tolerance.
How long does a capital-structure health check take?
Typically 2–4 weeks depending on the complexity of debt facilities and the depth of analysis required.
Is private credit becoming more attractive?
Private credit remains active but continues to price risk at higher spreads than banks. It is suitable for firms needing flexibility over price.
Which sectors benefit most from the rate cut?
Capital-intensive sectors, tech (especially SaaS), and firms planning expansion or automation projects benefit most from modestly lower capital costs.