What are interest rates and how do they affect your business?

Interest rates are everywhere in the headlines. One minute they're rising, the next they're falling, and suddenly everyone from central bank governors to business commentators is debating what comes next.

You've probably also noticed 'inflation' dominating the news cycle. The two are closely linked: when inflation rises or falls, interest rates typically follow.

If you run a business, you've probably seen these headlines and wondered: what does this actually mean for me?

In the UK, inflation has remained at 3.8% for the third month running as of September 2025, leading to uncertainty among analysts about whether the Bank of England will cut interest rates again in November¹.

Meanwhile, across the Atlantic, President Trump has been publicly pressing the Federal Reserve to lower rates while some have raised concerns that his tariff policies and a weakening US jobs market could push inflation higher².

With so much noise around interest rates and their link to inflation, it's easy to feel overwhelmed. But understanding how interest rates work – and how they affect your business – is crucial for smart financial planning, especially if you operate internationally.

This guide will break down what interest rates are, why central banks change them, where rates stand globally right now, their link to currency values, and most importantly, what these movements mean for your business's bottom line.

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Table of contents
What are interest rates? Why interest rates matter Who sets interest rates and why? Current interest rates around the world Why do interest rates change? How interest rates affect your business How Wise Business can help FAQs on interest rates

Disclaimer: The information in this article is for reference purposes only. Wise does not promote any investment or savings strategies, and none of the information on this page should be considered as financial advice. All financial and investment decisions should be made after thorough research and consultation with a qualified financial advisor and you may be liable for taxes on any earnings. Remember that investments, even in low-risk funds, are never guaranteed and your capital is at risk.

What are interest rates?

At its simplest, an interest rate is the cost of borrowing money or the reward for saving it.

When you borrow money – whether through a business loan, overdraft, or credit facility – you pay interest to the lender. This is typically expressed as a percentage of the amount borrowed over a specific period, usually per year.

When you save or invest money, the interest rate represents what you earn on those funds.

A savings account with a 4% annual interest rate means you'll earn £4 for every £100 you hold in the account over a year.

Why interest rates matter

Interest rates are fundamental to virtually every financial decision your business makes.

They determine how expensive it is to borrow money to fund expansion, purchase inventory or manage cash flow during quieter periods. They also affect how much return you can earn on your business savings or cash reserves.

But interest rates don't just influence your direct borrowing and saving costs. They ripple through the entire economy, affecting consumer spending, currency values, and the overall cost of doing business.

💡 Quick note on currency
Interest rates and currency values are closely linked. Changes in interest rates can trigger currency movements that directly impact international payments, payroll, imports, and exports. If your business operates across borders, this relationship matters – and we'll show you exactly how later in this article.

Who sets interest rates and why?

Central banks – like the Bank of England (BoE), the US Federal Reserve (Fed), or the European Central Bank (ECB) – set the benchmark interest rates for their respective economies.

The Fed conducts monetary policy by raising or lowering its target for the federal funds rate. It either "eases" or "tightens" monetary policy to influence short-term interest rates and overall financial conditions.

These benchmark rates act as a foundation for all other interest rates in the economy.

When the BoE changes its base rate, it influences the rates that commercial banks charge businesses and consumers for loans, mortgages, and credit, as well as the rates they offer on savings accounts.

The balancing act

Central banks adjust interest rates to manage two key economic goals: controlling inflation and supporting employment.

When inflation is rising too quickly, central banks typically raise interest rates. Higher rates make borrowing more expensive, which tends to reduce spending and investment across the economy.

It also means better returns on savings accounts or investment products, encouraging businesses and consumers to keep more money in their pockets (or bank accounts).

This cooling effect helps bring inflation back under control.

Conversely, when the economy is sluggish or unemployment is rising, central banks may lower interest rates to stimulate activity. Cheaper borrowing motivates businesses to invest and consumers to spend, which can boost economic growth and job creation.

The Fed’s mandate for monetary policy is to promote maximum employment, stable prices, and moderate long-term interest rates, commonly known as the dual mandate³.

It's a delicate balancing act. Cut rates too much and inflation could surge; raise them too high and you risk pushing the economy into recession.

Current interest rates around the world

As of October 2025, interest rates remain elevated compared to the ultra-low levels seen during much of the 2010s and early 2020s, but they've been gradually declining from recent peaks.

United Kingdom

The BoE’s Monetary Policy Committee (MPC) left interest rates unchanged at 4.0% at its September 2025 meeting⁴, following five rate cuts that reduced rates by 1.25 percentage points since August 2024⁵.

After inflation data showed prices remained at 3.8% in September, below the Bank's 4% forecast, economists are divided on whether another rate cut will come in November.

Some analysts believe the cooling inflation data supports another cut, while others argue the Bank will want to wait for more evidence before loosening policy further.

The UK also faces unique pressures. Chancellor Rachel Reeves is preparing her Autumn Budget for 26 November, with many speculating tax rises and spending changes that could influence the inflation outlook.

United States

In the US, the Fed sets interest rates differently. It publishes a target range known as the federal funds rate.

At its July 2025 meeting, the Fed cut its policy interest rate to a range of 4.00% to 4.25% – a 0.25% drop on its previous range⁶. Projections from analysts are indicating two additional rate cuts at their remaining meetings this year⁷.

However, the Fed has acted cautiously over the last 10 months amid concerns about inflation and President Trump's trade policies⁸.

The Fed held rates steady in May 2025 due to rising fears that the president’s higher-than-expected tariff policies would stoke inflation and slow economic growth⁹.

Fed Chair Jerome Powell acknowledged in October 2025 that the Fed faces a difficult balancing act, navigating the tension between employment and inflation goals¹⁰.

Trump's repeated demands for rate cuts have added political pressure, though the Fed remains committed to making decisions independent of political influence.

Eurozone

The ECB kept its key interest rates unchanged at its September 2025 meeting, with the deposit rate at 2.00%, after eight rate cuts since June 2024¹¹.

The ECB held rates steady for the second consecutive time, keeping the inflation outlook broadly unchanged while raising GDP growth projections for 2025 to 1.2% from the 0.9% forecast in June.

Like other major central banks, the ECB is trying to achieve a soft landing – bringing inflation back to its 2% target without tipping the eurozone into recession.

Weak growth in manufacturing¹² and ongoing geopolitical uncertainties, including trade tensions, are making this a challenging task.

Why do interest rates change?

Understanding why central banks adjust interest rates can help you anticipate potential changes and prepare your business strategy accordingly.

Inflation

Inflation is the primary driver of interest rate decisions. When prices are rising too quickly – meaning your money buys less today than it did yesterday – central banks raise interest rates to cool demand and bring inflation under control.

The Bank of England's previous cycle of rate increases from 0.1% in December 2021 to 5.25% in August 2023 came in response to high inflation, which peaked at 11.1% in October 2022¹³. The rapid rise in rates helped to gradually cool inflation over the following three years.

When inflation is low and stable, central banks have more room to cut rates to support economic growth.

Economic growth

Central banks monitor GDP growth, employment data, and business activity closely. If the economy is growing too quickly, they may raise rates to prevent inflation from taking off. If growth is weak and unemployment is rising, they may cut rates to stimulate activity.

External shocks

Unexpected events can force central banks to act. The COVID-19 pandemic triggered emergency rate cuts across the world – with UK levels dropping as low as 0.1%. More recently, energy price spikes following geopolitical events pushed inflation higher, prompting rapid rate increases.

In 2025, Trump's tariff policies represent a new type of external shock. As mentioned above, Fed Chair Jerome Powell stated that Trump's tariffs are the main driver of price increases, with economists predicting year-end inflation to sit around 3.1%, slightly higher than prior predictions¹⁴.

Currency movements

Changes in interest rates can trigger significant currency movements. When a country raises its rates, its currency often strengthens as international investors move money to take advantage of higher returns – although this isn’t always the case.

Also referred to as ‘hot money flows’, this dynamic is particularly important for businesses operating internationally.

Bond yields

Interest rates are also closely connected to government bond yields.

When bond yields rise, they often signal that interest rate increases may follow, as both reflect investor confidence in a country's economic health and borrowing costs.

For businesses operating internationally, understanding how bond markets move can provide early signals of currency volatility and changes to financing costs.

To learn more about this relationship and how bond yields impact your business, read our article on how government bonds affect global businesses.

How interest rates affect your business

Now comes the crucial question: how do these headline-grabbing rate changes actually impact your day-to-day business operations and financial strategy?

Borrowing costs

This is the most direct and immediate impact. When interest rates rise, the cost of borrowing increases across the board.

If you have variable-rate loans, overdrafts, or business credit cards, your monthly repayments will likely increase as rates go up.

Even if you're not currently borrowing, the cost of future borrowing – whether for expansion, equipment purchases, or bridging seasonal cash flow gaps – will be higher.

On the other hand, when rates fall, borrowing becomes cheaper. This can be an opportune time to refinance existing debt or take on new borrowing to fund growth initiatives.

The impact on your cash reserves

While higher interest rates make borrowing expensive, they can be beneficial for businesses holding cash reserves.

When rates are elevated, your business savings can earn meaningful returns. A business account earning 4% interest on £50,000 in reserves would generate £2,000 annually – money that can help offset other rising costs or be reinvested in the business.

Many businesses overlook this opportunity, leaving cash sitting in low or zero-interest current accounts. In a high interest rate environment, this represents a missed opportunity to put your working capital to work.

International payments and currency volatility

For businesses operating internationally, interest rate changes can significantly affect your bottom line through currency movements.

When a country's interest rates rise relative to others, its currency often strengthens. This is because international investors move money into that country to earn higher returns, increasing demand for the currency.

A stronger pound is good news if you're a UK business importing goods or paying overseas suppliers in foreign currencies – your pounds stretch further.

However, it's bad news if you're exporting, as your products become more expensive for international buyers; they might choose an alternative, more affordable option.

The opposite is true when rates fall. A weaker currency makes exports more competitive but increases the cost of imports.

The challenge is that currency markets can move rapidly when interest rate expectations change. A surprise rate decision, or even a hint from a central bank governor about future policy, can trigger sharp swings in exchange rates.

For example, if the Bank of England cuts rates by more than markets expect, the pound could weaken suddenly.

If you’re a UK-based business and have an invoice to pay in US dollars next week, that invoice just became more expensive.

Consumer and business confidence

Interest rates influence how confident consumers and other businesses feel about spending and investing.

Higher rates tend to reduce consumer spending as mortgages and credit become more expensive. This can impact businesses that rely on consumer demand.

It also makes businesses more cautious about investing in new software and services or hiring staff.

Lower rates generally boost confidence and encourage spending and investment, which can create opportunities for growth-focused businesses.

The credit crunch effect

When rates are high, banks can become more selective about who they lend to. They often look for lower-risk borrowers and may tighten their lending criteria.

If you're seeking financing, you may find it harder to qualify or be offered less favourable terms. This makes maintaining a strong credit history and healthy financial statements even more important during high-rate periods.

Planning for uncertainty

Perhaps the biggest challenge is uncertainty. No one knows for certain where interest rates will be tomorrow, in six months or a year.

We’ve seen experts in the industry tweak their forecasts in response to an ever-changing economic landscape.

On Europe’s rates, Shaan Raithatha, Senior Economist at Vanguard said in October that the firm has revised their predictions, now expecting ECB rates to stay at 2.00% until the end of 2026, dropping their previous expectation for additional cuts¹⁵.

In the US, analysts at Wells Fargo changed their monetary policy outlook in September, expecting a 1.25% drop by the end of 2026 – 0.50% more than previously forecast¹⁶.

The constant changes in opinion of everyone – from governments to economists –  highlights the difficulty in predicting future rate movements.

With that in mind, it’s crucial your business plans for multiple scenarios.

How Wise Business can help

Interest rates create both challenges and opportunities for internationally active businesses. Whether rates are rising, falling, or staying put, the key is having the right tools to manage the financial impact.

Protect yourself from currency volatility

When central banks change interest rates, currency markets can move sharply and unpredictably.

For businesses sending or receiving international payments, these sudden swings can significantly impact your cash flow and profit margins.

With a Wise Business account, you can hold money in 40+ currencies, allowing you to keep funds in the currency you need until you're ready to use them.

This gives you flexibility to time your conversions more strategically rather than being forced to convert at unfavourable rates.

When you do need to exchange currencies, Wise uses the mid-market exchange rate – similar to the rate you see on Google – with no hidden fees.

While you can't control interest rates or currency movements, you can ensure you're not paying inflated exchange rates that eat into
your margins.

Move fast when opportunities arise

Interest rate changes can create narrow windows of opportunity. When US rates fall, the pound could strengthen against the dollar meaning you can pay your US supplier's invoice for less.

With Wise Business, you can send most international payments in seconds, not days. This speed means you can make the most of favourable exchange rate movements before they reverse.

To capitalise on favourable rates without spending hours staring at currency charts, you could also use Wise Business’ Auto Conversion feature.

Auto Conversion allows you to set a target exchange rate which, if met, is converted automatically in your account with Wise’s low fees.

Here’s how you could use Auto Conversion if your business manages pounds and dollars:

Let’s say analysts expect a potential BoE interest rate hike on the horizon. You suspect this could strengthen the pound and your business has upcoming dollar commitments, such as a payment to a US contractor.

Through Auto Conversion, you can select a specific exchange rate and a precise amount to convert. The Auto Conversion calculator will show you exactly how many dollars you’ll get and your total fees – giving you complete transparency into your exchange.

For example, you could choose to convert £10,000 to dollars at a desired rate of 1.35; we’ll always use the mid-market rate. The calculator will show you the exact amount of dollars you’ll receive and the fees associated with your transaction.

If your target is reached, we’ll convert £10,000 instantly to dollars in your account. Now, you’ll have the funds readily available in your account to pay your US contractor when the time comes.

This means you can protect against adverse currency movements without constantly monitoring the markets. Set your target rate, take advantage of preferable rates and get on with running your business.

Earn returns on your cash balances

In a higher interest rate environment, leaving cash idle is a missed opportunity. While interest rates have come down from recent peaks, they remain significantly higher than the near-zero levels of the 2010s.

Wise Business's Interest product allows you to earn returns on your pound sterling, euro, and US dollar balances. Your funds are invested in high-quality, short-term money market funds backed by government-guaranteed assets*. Your capital is at risk and returns are not guaranteed.

Because these funds track central bank interest rates, your returns adjust quickly when rates change. You can easily access your money while earning a return without having to lock it away, helping you make the most of your working capital**.

*Interest is offered by Wise Assets UK Ltd, a subsidiary of Wise Payments Ltd. Wise Assets UK Ltd is authorised and regulated by the Financial Conduct Authority with registration number 839689. When facilitating access to Wise investment products, Wise Payments Ltd acts as an Introducer Appointed Representative of Wise Assets UK Ltd. See wise.com/interest for more information.

**Daily withdrawal limit of £100,000/ €120,000 for businesses.

Simplify international operations

Managing multiple currencies, sending international payments, and tracking exchange rates across various banks and payment providers can be time-consuming and expensive.

Wise Business brings everything into one account. You can hold, exchange, send, spend, and receive money in multiple currencies, integrate with accounting software like Xero and QuickBooks, and manage all your international financial operations in one place.

This simplification becomes invaluable when managing the challenges of changing global interest rates and their knock-on effects on currencies and cross-border transactions.

Open a Wise Business account today to take control of your international finances, whatever direction interest rates move in next.

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FAQs on interest rates

Below are answers to seven frequently asked questions about interest rates and how they affect businesses.

What is an interest rate?

An interest rate is the cost of borrowing money or the return on saving it, expressed as a percentage. When you borrow, you pay interest to the lender. When you save or invest, you earn interest on your balance.

Who sets interest rates in the UK?

The Bank of England's Monetary Policy Committee sets the UK's base rate. This benchmark rate influences all other interest rates in the economy, including business loan rates, mortgage rates, and savings rates.

Why do interest rates change?

Central banks change interest rates primarily to control inflation and support economic growth. When inflation is too high, they raise rates to cool demand. When the economy needs stimulus, they lower rates to encourage borrowing and spending.

How do interest rates affect currency exchange rates?

When a country raises interest rates, its currency often strengthens because international investors move money there to earn higher returns.

When rates fall, the currency typically weakens. These movements directly impact the cost of international payments for businesses.

What's the difference between base rate and the rate I'm offered on a loan?

The base rate set by the Bank of England is a benchmark. The actual interest rate you're offered on a business loan will be higher, as lenders add a margin based on factors like your creditworthiness, the size of the loan, and current market conditions.

Are interest rates going up or down in 2025?

As of October 2025, most major central banks have been gradually lowering interest rates after a period of increases.

However, the path forward is uncertain. In the UK, rates stand at 4.0% ahead of any potential changes in November, with markets divided on whether further cuts are coming.

In the US, rates are at 4.00 - 4.25%, but tariff-related inflation concerns may limit future cuts.

The European Central Bank has kept rates at 2.00% after a series of cuts and is expected to keep them there for some time¹⁵.

How can my business prepare for changing interest rates?

To prepare for interest rate changes, your business could speak to a financial advisor. You could discuss your borrowing arrangements and whether fixing rates could be a beneficial strategy ahead of any potential shifts in government monetary policy.

You could also consider building cash reserves to reduce reliance on borrowing.

If you operate internationally, use tools like Wise Business to manage currency risk and time conversions strategically.

Most importantly, scenario plan for different rate environments rather than betting on one outcome.

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Sources used:

1. UK rate cut hangs in the balance after latest inflation data | CNBC
2. Fed Reserve cuts interest rates but cautions over stalling job market | BBC
3. Breaking Down the Federal Reserve's Dual Mandate | Investopedia
4. Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 17 September 2025 | Bank of England
5. Official Bank Rate history | Bank of England
6. United States Fed Funds Interest Rate | Trading Economics
7. Federal Reserve calibrates interest rate policy amid softer hiring and lingering inflation | US Bank Wealth Management
8. Potential impact of Trump policies stirring inflation concerns at Fed, minutes show | Reuters
9. The Fed holds interest rates steady as Trump's tariffs spark uncertainty | NPR
10. With inflation and jobs in ‘tension,’ Powell warns of the Fed’s tightrope on interest rates | CNN
11. Monetary policy decisions | European Central Bank
12. Industrial production statistics | Eurostat
13. Cost of living and inflation | House of Commons Library
14. US prices rose at a 3% annual rate in September, slightly beating forecasts | The Guardian
15. ECB to pause rates at least until 2027 on steady inflation and growth outlook | Reuters
16. U.S. Economic Outlook: September 2025 | Wells Fargo

Sources last checked: 6/11/2025