Economic signals are aligning to give UK car dealers a renewed opportunity to grow margins and stimulate demand in the second half of 2025.
After an extended period of elevated interest rates, two modest base rate cuts are now expected, likely in August and again before the end of the year.
The Bank of England’s rate currently sits at 4.25%, having eased from its 2024 peak. While the pace of monetary loosening remains cautious, the direction of travel is clear. Lower rates should gradually reduce the cost of vehicle finance and ease funding pressures on retailers.
However, the inflation picture has become more complicated. CPI inflation jumped to 3.5% in April, up from 2.6% in March, primarily driven by fiscal policy changes, including hikes in energy tariffs and Vehicle Excise Duty (VED). Core inflation rose to 3.8%, and services inflation hit 5.4%, the sharpest increase since 1991.
Beneath the surface, the spike looks less alarming. Much of the rise stemmed from non-recurring or seasonal items, including indexed government-set charges, rather than broad-based price growth. Even so, underlying services inflation remains sticky, with an estimated 5.1% annualised pace on a three-month basis.
Stubborn inflation complicates the outlook for interest rates. While markets had priced in three cuts earlier this year, that expectation has softened. Two cuts now appear the most likely outcome, contingent on inflation cooling further in the months ahead.
For the automotive sector, even incremental rate reductions can improve affordability. Lower monthly payments make new and used cars more accessible to a wider pool of buyers, particularly as finance remains the primary purchasing method for new vehicles. A marginally softer interest rate environment could unlock pent-up demand and lift conversion across forecourts.
The used car market also stands to benefit. More accessible finance could increase the appetite for premium or nearly new vehicles, especially among customers looking to upgrade while maintaining manageable monthly commitments. The dynamic, however, may put added pressure on inventory, particularly as fleet renewals remain uneven.
For dealers themselves, lower rates reduce the cost of stocking and holding vehicles, freeing up working capital for reinvestment in digital tools, marketing, and customer service. After years of volatility and margin pressure, even modest financial relief can materially improve operational flexibility.
Yet interest rates alone won’t shape outcomes. Over the past decade, UK dealers have navigated a gauntlet of shocks, Brexit, COVID, semiconductor shortages, energy volatility, and shifting consumer behaviour. In response, the sector has undergone a quiet but significant transformation.
Retailers today are better equipped to deal with change because they’ve had to be. Many have stripped back complexity, invested in digital tools, and built stronger ties with lenders and manufacturers. The result is a more adaptable cost structure and operations that can scale up, or down, more easily. It’s these practical shifts, made out of necessity over recent years, that now give dealers a clearer path through uncertainty and a sharper eye for opportunity.
Encouragingly, consumer sentiment is beginning to stabilise. The GfK confidence index improved in May, while personal finance expectations and major purchase intentions showed signs of resilience.
House prices, a key driver of consumer confidence, are also proving surprisingly robust, rising 1.4% in March and 6.4% year-over-year, with annual growth expectations for 2025 now upgraded to 4.0%. Cash buyers continue to lead the activity, and affordability, rather than stamp duty, remains the key friction point.
Retailers who have invested in customer experience, data-driven engagement, and operational efficiency are best placed to thrive in this environment. The opportunity lies not only in market recovery but in continuing to apply the lessons learned during a decade of structural change.
While uncertainty persists, whether from fiscal pressures, labour market softness, or geopolitical noise, the broader conditions for progress are forming. Inflation is slowing (albeit unevenly), interest rates are set to ease, and consumers are showing signs of re-engagement.
Those retailers who stay focused, agile, and well-capitalised will be in the best position to meet the moment and make the most of it.
Mike Allen is the managing director of Cambria Private Capital