Rate cut won’t help economy, say experts

MANY businesses welcomed yesterday’s interest rate cut to 1.5%, but experts say it will do little to bolster the ailing economy.

There are concerns that the rate cuts – from 5% in September and over the last four consecutive months to its lowest ever level today – leave the Bank of England’s Monetary Policy Committee with little room for further adjustments.

Commentators also suggest that yesterday’s cut is another signal to the rest of the world of the UK’s weak economic position, serving only to further compound problems.

Ed Fazakerley, partner at Zeus Private Equity in Manchester, said the 0.5% reduction will have little effect on the economy and that getting banks to lend at sensible rates has to be the highest priority.

“Each additional interest rate cut made by the MPC will bring diminishing benefits to businesses and consumers,” he said.

“Liquidity in the banking system needs to improve before businesses can begin to take advantage of the lower rates.”

He said that private equity-backed companies will not benefit from the cut as they are largely debt-funded and will have hedged their interest rate payments at higher levels, in line with banking requirements.

“On the other hand, those that have interest rates that track LIBOR will start to see the benefits of the cuts, with the inter-bank rate itself at significantly lower levels than three months ago,” he added.

David Moore, partner at Begbies Traynor in Liverpool, also said that rate cuts do not necessarily help a struggling economy – because the cuts are not necessarily passed on by lenders, and because the return for savers is not adequate.

He added: “The events of the last few months give out the impression that even the government has no control over the economy and that most initiatives are simply knee jerk reactions – this in itself does not provide the confidence needed to move the country out of the recession.”

Paul Henly, policy manager for the Federation of Small Businesses in the North West, said that despite previous cuts, around a third of its members are still complaining about poor access to affordable finance.

“With rates now at their lowest ever level, small businesses are more concerned about access to money,” he said.

“The FSB would like a cast-iron guarantee that the banks will not only pass on the interest rate cuts, but pass on the money to the small businesses that need it.”