Bank of England decreased interest rates from 0.5 to 0.25 per cent as a pre-emptive measure post-Brexit. Is this an effective measure, or a case of too little, too early?
For the first time in seven years, the Bank of England has cut interest rates to a record low of 0.25 per cent.
The BoE has also announced a further £60 billion investment into its quantitative easing programme, to cushion a potential Brexit-induced recession.
The Monetary Policy Committee (MPC) voted to reduce interest rates from 0.5 per cent in an attempt to stimulate the economy following the referendum vote to leave the European Union.
A “pre-emptive strike”
According to Jonathan Russell, Partner at accountancy firm ReesRussell, reduce the base rate will have little impact as will any increase in quantative easing. “The world economy is slowing down mainly as a result of the levels of world debt and as with supermarkets chasing after the same customers, it is now countries all chasing after a reducing amount of trade,” he explained.
“UK almost certainly will see an increase in the rate of inflation, which the Bank of England will probably have to ignore, due to the devaluation of sterling but it is unlikely that wages will follow. There in reality is no quick fix and a steady sustained and ordered approach is the only way forward and a realisation that there is no right to a steady improvement in people’s standard of living unless it has been earned,” he added.
Adam Tyler, chief executive of the National Association of Commercial Finance Brokers (NACFB) sees this as a “pre-emptive strike by Threadneedle Street,” the impact of which may not be clear in the short term.
“The Bank of England clearly wants to get ahead of the economic curve rather than risk falling behind it. The rate cut is as much about boosting consumer and business sentiment as it is hard, real-world economic impact. After all, a quarter point cut can only achieve so much,” he said.
Looking at the job market as a marker of economic growth, James Reed, chair of job platform reed.co.uk stated that the UK is at risk of a hiring slowdown. “Our up-to-the-minute jobs data shows that UK businesses are still hiring. However, there are clear signs of a slowdown that should not be ignored,” he said.
The latest figures from reed.co.uk show that more than two thirds of the nation’s employment sectors are healthier than they were in July 2015. The strongest amongst these are security and safety (up 47.7 per cent), Education (up 28.8 per cent) and construction and property (up 24.5 per cent). While the job market is still growing, reed.co.uk has seen the average rate of growth decline to below 10 per cent in 2016 compared with 24.7 per cent for the whole of 2015. Month on month, growth is down marginally from 8.9 per cent in June to 8.2 per cent in July.
Reed added, “If it was up to me, I would aggressively cut taxes and interest rates to avert a recession.”
Too little, too early
NACFB’s Tyler asserted that by cutting rates the Bank is sending a message to the markets that it is proactive and prepared to act in the face of potential economic turmoil. The fact remains that it’s been ‘business as usual’ for SMEs.
“Since the vote to leave the EU, we have not noticed a material change in demand from businesses to borrow or banks and other providers to lend,” he added. “The predicted corporate paralysis simply hasn’t happened.”
Echoing this sentiment, Funding Options CEO Conrad Ford sees the interest rate cut as more indicative of BoE’s concern over the state of business lending post-Brexit.
“The Brexit Crunch hasn’t yet shown up in the real economy – this decision must be driven by what the MPC members have seen in indications on lending to businesses,” he said.
According to Ford, this level of caution has perforated the wider lending landscape, with major lenders having backed away from deals they would previously have agreed post-Brexit. “Worryingly, it’s now showing up in alternative finance, with many funders retrenching. It wasn’t meant to be this way, alternative finance was meant to take the slack when the next credit crunch came,” Ford explained.
The wrong message
Last week, the Peer-to-Peer Finance Association (P2PFA) showed net lending growth though P2P platforms fell by 43 per cent in the second quarter of 2016, growing by £174 million compared with £304 million in the first three months of the year. While growth may be slow, it is growth nonetheless.
Angus Dent, CEO of business crowd lender ArchOver sees this move as a vote of “no confidence” in UK’s economic capabilities. “Any SME considering raising money is unlikely to be swayed by a cut of 0.25 per cent when rates are already at historic lows. If anything, they will interpret the move as one that creates uncertainty and supports the view that the UK is about to talk itself into recession after the Brexit vote,” he stressed.
“A more positive message might have been achieved by putting interest rates up.”
Culling the herd
With business overdrafts down 50 per cent in four years, many firms have resorted to holding deposits to survive expected dips in cash flow. The SME Finance Monitor reported at the end of 2015 that 24 per cent of businesses hold a credit balance of£10,000 or more, up from 16 per cent in 2012.
If the UK’s major banks look to pass on the hit from low interest rates to business customers, SMEs will increasingly look to alternative finance providers to help manage cash flow issues and realise ambitions. Paul Haydock, CEO of invoice finance provider DueCourse predicts that this may be the best time to weed out the stronger players from those less invested in SME growth.
“Confidence and consistency are absolutely vital within the SME community right now. We will see a shakeout of businesses who are not wholly committed to UK SMEs,” he said. “Conversely, there will be those who are prepared to take the long-term view.”