Banks pushed to pass on interest rate cut

Despite Thursday's 1.5% cut, there's no guarantee that small business will see lower lending costs...

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Last Updated: 31 Aug 2010

Britain’s SMEs wanted drastic action on the economy – and on Thursday, they certainly got it. The Bank of England’s decision to slash interest rates to 3% has created a few jitters in the stock market, but it seems to have gone down well with small business groups, whose members could now see their borrowing costs plummet. However, this will only happen if the banks will pass on the savings – and so far, some of them have remained suspiciously quiet…

Although nobody expected a cut of this magnitude, trade bodies seemed all in favour of the Bank’s bold move. John Wright, the chairman of the Federation of Small Businesses, praised the ‘unexpectedly large rate cut’, suggesting it could potentially save small firms about £750m in loan and overdraft charges. Phil Orford from the Forum of Private Business agreed, suggesting that it would ‘boost the confidence of business owners’. But both agreed that this would only happen if the banks were pressured into passing on the cut in full.

Indeed, despite the fact that interest rates have now almost halved in the last 12 months, banks are still reluctant to trust each other – the inter-bank lending rate remains stubbornly high (the three-month rate is currently hovering around 5.5%). This is the reason why borrowing is still so expensive for small firms – and it remains to be seen whether rate cuts alone will be enough to break the current logjam in the credit markets.

The initial signs haven’t been great: although Lloyds and Abbey promised to pass on the cut in full, several lenders rushed to withdraw their tracker mortgages – clearly afraid that their margins were about to take a pounding. Gordon Brown has promised to wade in and apply foot to throats, and it’s clear that all the banks – particularly those who have recently taken public money – will be under serious pressure to fall into line.

The cut should bring down rates eventually – but the problem is that it might take weeks before it translates into lower rates for business borrowers. And with figures suggesting that hundreds of small firms are going bust every week, there could be a number of struggling companies that won’t be around for long enough to benefit. What’s more, the cut also shows just how bad the Bank thinks things are going to get in the UK – and that’s bad news for everyone...

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