Rates could fall below 1% if banks don’t lend

NORTH west business leaders have welcomed the shock 1.5% cut in interest rates, and are calling on the banks to pass them on to struggling firms.

Although the drop to 3% has received a hearty welcome, there is concern that it won’t be felt in the real economy.

Economists say that if the banks don’t pass on rate cuts and start to lend, further cuts can be expected.

Andrew Smith, KPMG’s chief economist, said he would not be surprised to see rates down to 1% or even lower within the coming year.

And Darrell Matthews, regional director for the Institute of Directors in the North West, said he thought interest rates could touch 2% or less by this time next year.

He said: “It is important for business confidence in the region to see that the Monetary Policy Committee is acting to stave off the threat of deflation.”

But according to Phil Rees-Roberts, of Liverpool-based commercial legal practice Rees-Roberts Solicitors, the level of the cut demonstrate just how worried the MPC is about the depth of the looming recession.

“Banks have been downsizing risk by upping the rates they charge for loans to business. Let’s hope that money does start to flow to businesses – and at sensible rates,” he added.

Action may have come too late to head off a recession, but the general view in the region is that such a large cut could make it less painful and may allow for an earlier recovery.

Patrick Loftus, senior practice partner at Deloitte in the North West, said it is likely to be early 2009 before there is any real upswing in activity but that this is significantly earlier than otherwise expected, had yesterday’s rate cut not been so dramatic.

“Lenders have already been put under pressure by the government to pass on a lot of the reduction to borrowers, and because of this, the property and retail sectors are likely to experience a more positive Christmas.”