Introduction
On September 18th 2025, the Bank of England decided to keep interest rates unchanged at 4%. The decision comes in the context of continuing fears about the effect of inflationary pressures on consumers and the market. England’s central bank also cut back on its bond-selling programme from £100 billion down to £70 billion.
Breakdown
The Bank of England’s current target for inflation is 2%. However, the most recent figure was almost double that amount in August at 3.8%. This is one of the main reasons why the central bank did not change interest rates.
The Business Case
An interest rate is what one entity pays for borrowing money or the fee it charges when lending that money out to a borrower. Higher interest rates mean that businesses pay more on their loans and individuals pay more on their mortgages, which leaves less money for them to spend elsewhere. The UK is currently facing a slowing labour market and higher costs of living. By keeping interest rates the same as they were in August, the central bank hopes that inflation will naturally ease out without the need for drastic measures.
Legal Team Involvement
Any decision on interest rates will be of great interest to law firms and the following key departments in particular.
Banking & Finance: Most commercial law firms have well-established B&F teams which assist corporate clients in drawing up loan agreements, refinancing transactions, and using loans to acquire other companies or undertake an investment (leveraged finance).
As borrowing costs continue to remain high, this department would pay close attention to highly leveraged clients (those with a high debt to equity ratio) to advise them on mitigating credit or default risk. When acting for lenders, the B&F team may have to advise on tighter financial covenants in the loan agreement to guard against default risk.
Corporate/M&A: Many buyers take out loans to finance acquisitions of other corporate entities. As the cost of borrowing remains unchanged, buyers who rely heavily on loans to finance their M&A deals may struggle and some deals may stall. M&A lawyers need to understand their clients’ balance sheets in detail to advise on the best form of consideration for each deal. Buyers who are highly geared may be advised to pursue joint ventures or deals financed by the issuing of shares especially if interest rates continue to remain high for some time.
Real Estate: Financing property transactions continues to be expensive, which puts pressure on development pipelines. Lawyers would need to assist developers and landlords in negotiating finance terms with lenders. They may also advise on using the joint venture mechanism to distribute risk across a larger pool of real estate borrowers.
Restructuring & Insolvency: Companies holding onto much debt will experience prolonged stress as they continue to face tight cash flows. Lawyers would usually begin by advising on restructuring plans, schemes of arrangement or company voluntary arrangements (CVAs). They would help with negotiating extensions with lenders and selling low-performing assets to increase cash temporarily.
Capital Markets: As borrowing costs remain unchanged, issuing shares may look comparatively more attractive to companies than debt financing. Corporate clients may pursue initial public offerings in larger numbers, and their lawyers will need to draft the prospectus and undertake extensive research of the disclosures offered by the company to ensure listing rules are being satisfied. Alternatively, companies may consider hybrid instruments such as convertible bonds as an alternative way to raise funds.
Future Outlook
The decision to keep rates at 4% maintains pressure on borrowing costs for businesses and individuals, which ultimately affects corporate activity. Law firms will consider how and if so, to what extent, their advice will differ depending on the client's sector and their balance sheet.