Interest rate cuts: Food industry impact
07 August 2025What is the impact of an interest rate cut on the food industry?
Lower interest rates on the way
In a widely anticipated move, the Bank of England’s Monetary Policy Committee (MPC) has reduced the Official Bank Rate from 4.25% to 4.00%.
This marks the fifth rate cut since August 2024, as policy makers attempt to revive a faltering labour market and cool economic stagnation while keeping inflation in check.
Why are interest rates falling?
The decision to cut rates is driven by a complex mix of factors:
Sluggish growth: UK economic growth remains anaemic, with quarterly expansion hovering around 0.1%
Labour market weakness: Employment indicators have softened, prompting concerns about consumer spending power
Inflation dynamics: While headline inflation fell sharply in 2023, it has begun to rise again, reaching 3.6% in June 2025. Core inflation and services inflation, key indicators of domestic price pressure, remain persistently high.
Consumer sentiment: IGD research shows show rising inflation expectations among households, which could influence wage demands and pricing behaviour
What will be the impact on the food Industry?
The food industry sits at the sharp end of these macroeconomic shifts. Here’s how the rate cut, and broader economic trends are likely to play out:
Cost pressures remain
Despite the rate cut, food businesses continue to grapple with rising costs. Labour expenses, regulatory burdens, and energy bills are all contributing to elevated inflation.
IGD’s latest Viewpoint report, UK food inflation forecasts 2025-2027 warns that retail food inflation will remain stubbornly high, outpacing general inflation, averaging 4.0% in 2025, up from our previous forecast of 3.4%. This is driven by regulations, extreme weather, and global commodity pressures.
Consumer behaviour shifts
Lower interest rates may ease borrowing costs for consumers, but the impact on spending is likely to be muted. Many households remain cautious, scarred by previous spikes in food prices and broader cost-of-living pressures.
IGD’s Shopper Confidence Index has dipped, especially among lower-income groups, with expectations of rising taxes and food prices.
Business strategy: adapt and thrive
As highlighted in IGD’s recent Viewpoint report, How to respond to rising costs in 2025, food businesses are encouraged to reassess their operating models. The report cautions that short-term cost-cutting measures, such as reducing headcount, can undermine long-term capability. Instead, it advises investing in automation, innovation, and strategic planning to build resilience and maintain competitiveness.
What does this say about growth and Inflation?
The MPC now expects CPI inflation to rise to 4.0% in September, with food price inflation reaching 5.5% by year-end, driven by global commodity prices, labour costs, and Extended Producer Responsibility regulations
“Bank staff expect food price inflation to fall back gradually next year as pressures from labour cost increases fade and global wholesale food price inflation returns to historical averages. This is broadly in line with intelligence from the Banks’ Agents, who report that most contacts expect food inflation to approach 5%–5.5% in the second half of the year before falling back to around 2%–3% in 2026.”
— Monetary Policy Report, August 2025
This is line with IGD Food inflation forecasts.
The rate cut signals that the Bank of England is prioritising growth, but it also reflects concern that inflation may not return to the 2% target until early 2027.
This balancing act, stimulating demand without reigniting inflation, is fraught with risk.
Inflation is likely to remain higher for longer than previously forecast, and growth will stay subdued through 2025.
Unemployment is expected to peak at 4.9% in Q3 2026, and living standards will not recover to pre-pandemic levels until 2027/28.
IGD opinion
The Bank of England’s latest rate cut may ease some financial pressure, but it does not signal a return to economic stability. With inflation expected to remain above target and growth forecasts still weak, the food industry faces a prolonged period of uncertainty.
Businesses must look beyond short-term relief and focus on long-term resilience. This means shifting away from reactive cost-cutting and towards proactive investment in capability. Food businesses should prioritise automation, innovation, and strategic planning to remain competitive in a volatile environment.
The industry’s ability to lead through change, rather than simply absorbing it, will be critical. Building a stronger, more adaptive system is not just a response to current challenges, but a foundation for future success.