What the cut in interest rates means for micro-businesses

Posted on Aug 4th, 2016 | Tax

For the first time in more than seven years, the Bank of England has changed the base rate. But rather than the increase many people had been expecting until a few weeks ago, interest rates have fallen to a record low of 0.25%.

This is largely as a result of June’s referendum vote for Britain to leave the EU and the consequent loss of economic confidence.

The Bank’s Monetary Policy Committee (MPC) has decided that rates needed to be reduced in order to stimulate economic activity and boost business investment. In addition, MPC members have voted for a new stimulus package which will see billions of pounds’ worth of bonds bought from banks in order to encourage more commercial and consumer lending.

So how is today’s announcement likely to affect micro-businesses?

Bank lending

In theory, a lower base rate and more quantitative easing (QE) should encourage banks to lend – and this means cheaper loans and overdrafts for businesses. However, the extent to which this translates into reality remains to be seen. When similar measures were used in the wake of the financial crisis, banks were often still reluctant to lend due to uncertainty over future market conditions.

Conrad Ford at business finance firm Funding Options said:

“This interest rate cut shows just how worried the Bank of England is about the state of business lending post-Brexit. The Brexit crunch hasn’t yet shown up in the real economy – so this decision must be driven by what the MPC members have seen in indications on lending to businesses.

“We’ve seen exactly that ourselves. Immediately as the Brexit result was announced, major lenders such as high street banks backed away from deals they would previously have agreed.”

Inflation and the pound

While the UK inflation rate is relatively low at present, the Bank said that it expected prices to rise in coming years as a result of weaker sterling. The consumer price index (CPI) is expected to exceed its 2% target in 2018 as imports become more expensive.

Sterling has fallen as a result of declining economic confidence in the UK; lower interest rates mean that there is less demand for the pound as returns are less than on other currencies.

Mike Cherry, national chairman at the Federation of Small Businesses, said:

“FSB members do have concerns about the longer term economic outlook. There is a real risk that sterling will depreciate even further, which could benefit the UK’s visitor economy and small exporters, but could also affect prices, inflation and investment.”

Savings and mortgages

The base-rate cut is another blow for savers, who have faced very low returns for most of the past decade. Rates on ISAs and deposit accounts could fall even further.

There is a good chance also that mortgage rates will fall to some extent but, as with savings rates, they are already very low in historic terms, so the scope for reductions is limited.

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Written by Chris Torney

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