Call for interest rate cut to be passed on in full

Dec 5 2008 by Karen Dent, The Journal

THE slashing of interest rates to their lowest level since 1951 has been applauded by North East business leaders, but they say the reduction must be passed on to struggling companies and consumers.

The Bank of England’s Monetary Policy Committee (MPC) cut the base rate to 2% in an attempt to prevent the UK falling deeper into recession; it follows November’s 1.5% cut.

Lloyds TSB was quick out of the starting blocks, almost immediately saying it would pass on the cut to its North East business customers with variable linked loans and overdrafts.

The third successive monthly rate cut was welcomed by Liz Mayes, the CBI’s assistant regional director, who said: "The economy needs a significant monetary stimulus and the Bank has clearly decided this will be best achieved by another big cut in interest rates. What is critical for business and consumers alike is that this reduction is passed on.

"The economy is stalling, inflation is expected to undershoot the Bank’s own target and the headline RPI rate of inflation is likely to turn negative for at least a few months in 2009. We need to see lending improve and to keep business working."

The Federation of Small Businesses regional chairman Colin Stratton said: "As we enter the Christmas period, many small businesses are worried about how to deal with higher operating costs, so it is now imperative that the banks are mindful enough to pass on these rate cuts.

"Lower rates will bring a vital boost to the North East market place and we compel the banks to pass this on and lend fairly to small businesses."

Richard Bottomley, president of the North East Chamber of Commerce, called the combination of the rate reduction and the stimulus for small firms announced in last week’s Pre-Budget Report a "welcome boost to the economy".

He added: "Fuelled by fears of deflation, this cut will be aimed at boosting spending by the public. But the MPC must ensure that long-term inflation is not overlooked, as any recovery will be severely hampered if this were to happen."

EEF, the manufacturers’ organisation, called for more pressure to persuade the banks to pass on the cut and free up access to credit.

Regional manager Tony Sarginson said: "The Bank is pulling out all the stops to prevent the recession from deepening.

"It is now essential that Government also steps up to the plate with targeted measures to support business and brings pressure to get high street banks to start lending again."

The North East branch of the Institute of Directors said the Bank’s action had been "bold but necessary".

Regional chairman Richard Elphick said: "The MPC is clearly taking the view that the longer deep interest rate cuts are delayed the worse the recession is likely to become.

"The MPC still has some ammunition left but not a lot. We can expect further rate reductions early in 2009 but then the MPC will have exhausted its interest rate armoury."

Leigh Taylor, area director, Lloyds TSB Commercial in the North East and Cumbria, said: "Today we are carrying out the pledge made in our new small business Charter to pass on in full any base rate reductions until the end of 2009."

Stephen Slater, commercial services partner at RMT accountants in Gosforth said: "The move by the Bank of England to cut the base rate by a further one per cent may help to stimulate further confidence in the North East business community, but only if financial institutions pass on the rate reduction."

Paul Woolston, senior partner at PricewaterhouseCoopers LLP in Newcastle said: "Interest rate cuts take around a year to have their full effect on economic growth, and there will also be some losers amongst savers, so it would be wrong to expect a quick turnaround in the economy as a result of this move.

"Decisions by the banks on the volume of lending will also be at least as important for the economy as today’s decision to cut the cost of loans."

The reduction comes as house price statistics showed values continuing to plummet. They were down 2.6% last month – their biggest drop since September 1992.

Services industry activity in November shrank at its fastest pace for 12 years, reflecting similar grim news from the manufacturing and construction industries.