The base rate for borrowing is now sitting at 5.25 per cent after today’s quarter-point reduction.
The decision was expected by many in the City. Despite fears about inflation, the economy is continuing to slow, meaning a rate cut is justified if the bank wants to keep recession at the door.
But what does it mean for entrepreneurs?
Well, the most important thing is that point about recession. We must try to avoid it at all costs.
A lower base rate also technically means a reduction in the charges you pay to your bank for money you borrow. However, many banks are refusing to pass this benefit on to customers because the credit crunch means they need all the money they can get.
Edward Menashy, the chief economist at Charles Stanley Stockbrokers, thinks the wider liquidity issues mean the rate cut will have little impact for another reason. “Is the bank willing to lend you money in the first place?” he asks. “There is some doubt on that, quite clearly. For example, you see mortgage lending has declined dramatically and loans to businesses have declined.”
Menashy doesn’t think we’ll go into textbook recession (two consecutive quarters of negative growth), but believes growth may drop to 1.5 per cent.
Still, he’s strangely optimistic about this prospect. His advice is for business owners is to continue plugging away. “To be honest with you, what alternative does one have? You can’t pull over the duvet and fall asleep, as tempting as it is,” he says.
“Like all periods in life, one goes through good times and difficult times. The difficult times are like winter. Winters are needed because the bugs get going and viruses are killed off and then we position ourselves slowly, but surely, to look ahead at a fresh period of expansion.”
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