David Worrow, audit partner for advisory firm Baker Tilly, looks at the impact of the Bank of England’s 1.5 per cent interest rate cut
This rate cut was widely presaged in the press, but nobody guessed it was going to be 1.5 per cent. Obviously it’s good news for borrowers, but it’s not as simple as that.
What we’re seeing is banks increasing their margins rather than passing on the full cut. Some smaller borrowers are facing increases of one per cent and many deals have been repriced at London Interbank Offered Rate (LIBOR), which is higher than the base rate.
There are certain sectors where the banks aren’t lending at all, or looking to reduce their exposure, such as discretionary spend retail and some smaller property developers.
I think the biggest problem is liquidity, not pricing. If banks won’t lend money, the price is irrelevant, but the only weapon the Bank of England has [to deal with the credit crunch] is interest rates. That means there will quite likely be more rate cuts, unless some of the measures the government is considering, such as a fiscal stimulus to the economy through tax cuts, have their intended effect.
Although rates may be reduced further, businesses that anticipate needing funding should talk to their bank manager sooner rather than later. Even if you don’t think you need funding you should still consider what would happen if some of your existing funding was withdrawn. And you should focus on your cash flow as a matter of priority.