Interest rate cuts not helping small businesses

News by Adfero for Simply Business

Interest rates have fallen to their lowest level in over 300 years. But small businesses representatives are worried that the rate cuts will not be passed on to SMEs.

In November 2008, interest rates sat at 4.5 per cent. By January the Bank of England’s monetary policy committee (MPC) had cut rates to just 1.5 per cent, the lowest level in the Bank’s history and February’s meeting saw the rate further lowered to just one per cent.

The successive cuts aimed to prevent inflation undershooting its two per cent target by stimulating the economy and increasing liquidity.

For small businesses, interest rate cuts raise the prospect of better rates on business loans and improved deals for the rental or purchase of business premises.

Cuts not enough

However, business leaders have warned that further cuts could be needed to prevent a worsening of the economic conditions faced by British companies.

Having expressed disappointment at the 0.5 per cent cut in January, David Kern, chief economist at the British Chambers of Commerce, said February’s rate slash was unsurprising.

“British business is not surprised by the MPC’s decision. With the recession worsening, and deflation a distinct risk, there is still scope for further interest rate cuts in the next few months, to almost zero” he said.

“But, with rates at very low levels already, the focus of UK monetary policy must now inevitably shift towards forceful quantitative and credit easing measures, with the aim of increasing the money supply and removing blockages in the credit markets.”

He continued to say that due to the Bank’s “unduly cautious” record in the early stages of the credit crunch, UK businesses need to be reassured that it is prepared to implement unconventional techniques to alleviate recession and threats of deflation.

Also commenting on the most recent base rate cut, Confederation of British Industry chief economic advisor Ian McCafferty said that the drop in rates should support business confidence and, when combined with previous cuts, help stimulate the economy.

“But at these very low levels of interest rates, and with the credit mechanism still impaired, it is vital that the Bank swiftly supplements today’s move with direct intervention in the corporate lending markets,” he added.

Business representatives have also been quick to point out that any improvement in the current economic situation will rely on interest rate cuts being passed on through a relaxation of lending terms.

Lack of availability

Following January’s rate cut, John Wright, national chairman of the Federation of Small Businesses, warned that a third of its members were still suffering from poor access to finance - suggesting that the real problem is not the cost of credit but its availability.

In addition, prior to February’s MPC meeting, a survey by the FSB highlighted that rate cuts have not boosted small businesses as much as had been hoped.

According to the poll, almost two-thirds of small enterprise owners wanted the base rate to remain at 1.5 per cent, suggesting they had not felt the benefits of previous cuts.

“These figures suggest that the recent interest rate cuts are not having the desired effect and other means of economic stimulus are required,” commented Mr Wright.

“Small businesses are clearly worried that this monetary policy has been used extensively over the last few months yet they are still struggling to access cheaper finance.”

The latest survey from the Forum of Private Business (FPB) lends weight to claims of poor access to finance among small businesses.

Companies rejected

The organisation’s survey of 6,000 members found that 33 per cent applied for additional funds in the fourth quarter of 2008 but 27 per cent of these were rejected outright, while a further 20 per cent were partially rejected.

Previous results found that only 12 per cent had problems accessing finance, so these figures represent a dramatic reduction in access to financial products.

FPB chief executive Phil Orford said of the results: “The FPB’s ongoing research … shows that UK lenders are still not providing sufficient funding for small businesses.”

“The facts are now clear. Government and Financial Services Authority (FSA) policies have not improved the ability of banks to lend. In addition, banks have not passed on, in full, the Bank of England’s previous three cuts to the cost of borrowing because many clients have fixed rate rather than variable rate arrangements.”

Mr Orford continued: “The bail-out has not delivered for small businesses or for the housing market. We are calling for additional measures to improve the availability of loans and overdrafts and for the delivery of the promised £1 billion in small business funding.”

The FSB survey found that over 40 per cent of respondents believed the cost of banking had increased in the six months to December 2008. In addition, 4.6 per cent said loan facilities had been completely withdrawn, while 15.1 per cent said overdrafts were less freely available.

The survey suggests that small businesses will continue to request financial support; with nearly a quarter saying they were likely to seek new borrowing in the first quarter of 2009.

The UK is not the only region to have implemented dramatic interest rate cuts in response to the economic downturn. Extensive cuts were also witnessed in the USA, where the Federal Reserve reduced headline rates to between zero and 0.25 per cent. The European Central Bank also delivered the biggest interest rate cut of its ten-year history, leaving rates down at 2.5 per cent by year-end.