Interest rates, inflation and tax: What it means for M&A activity

It came as little surprise that the Bank of England held interest rates at 4.0%, and inflation remained at 3.8%. The Monetary Policy Committee voted by a majority of 5-4 to maintain Bank Rate at 4%, reflecting cautious optimism ahead of further signs of inflation cooling and the government’s upcoming Budget on 26 November, where speculation is growing that Chancellor Rachel Reeves may raise taxes.  

With interest rates now stabilising, we find ourselves in what feels like a “gradual downward path” environment. Monetary Policy is balancing the risks around meeting the 2% inflation target sustainably. While inflation persistence has eased, weaker demand poses medium-term risks, creating a more balanced outlook. From a macro perspective, this stability tends to give acquirers greater confidence. Borrowing costs have steadied, and expectations are shifting towards rates having peaked. This improving outlook makes debt-financed transactions more attractive. Even if 4% remains high compared to the era of ‘cheap money’, it feels more manageable in a market anticipating future cuts rather than further hikes. 

Headwinds remain. If investors suspect rates could rise again or broader economic conditions soften, they may delay acquisitions or proceed cautiously. Sectors such as health and social care – particularly those pursuing buy-and-build strategies or refinancing, may face challenges. Higher interest payments can strain cash flow, and funding for new builds or refurbishments becomes harder to secure. Conversely, if rates remain stable and inflation continues to fall, real wages and purchasing power could improve, easing wage pressure. However, fiscal policy will be critical; tighter tax measures could offset these gains and dampen consumer confidence. 

With the Autumn Budget looming, the UK faces rising tax burdens. According to the Institute for Fiscal Studies, increases to the ‘big three’ taxes are likely, alongside new revenue-raising measures. One example is the proposed 3p-per-mile tax on electric vehicles to offset declining fuel duty revenues. Further changes could also affect partnership taxation, particularly LLP structures, as the government seeks to address an expected £22 billion shortfall in public finances. 

Against this backdrop, timing becomes critical for M&A transactions. Buyers and sellers may accelerate deals ahead of tax changes, while business owners facing lower post-tax profits could hesitate to go to market-or push for higher valuations to counteract fiscal drag.  

Looking ahead, the combination of stable interest rates and potential tax increases could shape the M&A landscape over the next 12–24 months in several ways: 

Gradual recovery in deal flow: With inflation easing and the base rate steady at 4% (and the possibility of cuts), mid-market M&A activity may see a modest uptick, particularly from strategic buyers and PE firms with capital reserves. 

Resilient targets in focus: Businesses with strong fundamentals – low debt, high cash flow, and exposure to defensive sectors like healthcare, will attract greater interest. 

Valuation pressures: Rising taxes and sustained borrowing costs could compress returns, soften valuations, and slow deal momentum. 

In short, while the current environment may not be booming, it is far from stagnant. For dealmakers, the next year will be defined less by volatility and more by precision, timing, structure, and strategic alignment will all be key.