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Interest rate cut: the reaction

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This is the fifth interest rate cut since October. But this a thumb in the dam? Or a genuine economic bandage for wounded businesses?

Andrew Montlake, partner at mortgage broker Cobalt Capital, is skeptical:-

"Another month, another cut, although you do wonder what it will achieve. Thereare real question marks over the effectiveness of this latest reduction, as while it will benefit certain borrowers, it will certainly not solve the broader issues in the lending market, specifically the availability of funds. In fact, this latest cut could even make things worse. If lenders cannot attract savers, the great thaw in lending that we are all waiting for could be further delayed."

Senior partner at Dreweatt Neate estate agents, David Smith, is rather more optimistci about the cut:-

"While the interest rate cut will have little, if any, effect on mortgage rates and the restricted flow of loans, in a perverse way it could stimulate the property market.

"Savers are being hit so hard that some are turning to property in search of a better return, especially given current price levels. People who have sold and are now renting are increasingly finding that the interest on the money in the bank is no longer covering their rent. As a result, they are slowly beginning to re-enter the market, knowing that prices are sharply lower than a year ago and that now could be an excellent opportunity in the medium to long term.

"Interest in the market is already much stronger than in 2008 and enquiries more serious, which is reflected in the most recent figures from the Halifax that show that house prices actually rose in January. We are by no means out of the woods yet, as transaction levels are still low and other sources, such as the Nationwide, reported price falls in January only last week, but there aresome positive signs."

Daniel Lee, CEO of property search engine, Globrix, confirms that the property market is already seeing a boost:-

"Traffic on our website last month was more than double that of December 2008. The number of searches increased by 71 per cent, with most people searching at the bottom end of the price scale. Crucially, this suggests the first time buyer is starting to look again."

Mark Thompson, senior dealer at Moneycorp, fears for the fate of international businesses:-

"Today’s decision by the MPC to cut the interest rate to 1 per cent will put further pressure on sterling, adding to the foreign exchange volatility that has plagued 2009 so far.

"This is worrying news for UK importers, who will witness increased exposure to risk in light of the rate cut. Many of our high street retailing clients, importing from the Far East and Turkey, have already seen huge increases in prices from suppliers, matched by concerns over decreasing supply as factories close down.

"Importing businesses in the UK should seek to identify their transactional risks (the risk that invoice costs will increase, or future cash flows will be reduced) in order to be able to hedge their exposure and cope with the adverse exchange rate movements. Once these risks have been identified, businesses should manage them proactively – adverse rate fluctuations can disrupt months of planning.

"For exporting businesses, the rate cut will act as a catalyst to further demand from overseas as sterling will become cheaper. However, this effect is likely to be offset by the general decline in global trade. Manufacturers exporting internationally should look to manage their risk by putting forward contracts in place and matching income from overseas sales."

Finally, a word of warning from Simon Hodge, an independent financial adviser on Rubii.co.uk:-

"For savers, and pensioners in particular, this latest cut in the base rate is another major blow. While the banks may not pass on the reduction to borrowers, it’s a safe bet they will pass it on to the beleaguered saver. In extreme cases, this could result in accounts paying zero interest, and where these accounts charge a monthly fee they could, in theory, generate a negative return.

"Of course, if the interest payable on a person’s savings is less than inflation, they’re effectively in negative territory anyway. For savers, these are very anxious times. I am also worried that the dire returns on savings accounts could tempt pensioners and other cautious savers into riskier investments that are really not appropriate for them."

Let us know your views on the interest cut in the Real Business forum.

Related articles "How will the record-low base rate affect my business?” Interest rates: reaction to the record low Interest rates cut to 1.5 per cent

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