Interest rate cut welcomed by UK businesses

The Bank of England’s decision to cut UK interest rates to 0.25% – a record low and the first cut since 2009 – has been given a cautious welcome by the Federation of Small Businesses.

Chairman Mike Cherry said: “Small businesses are operating during a period of significant political and economic uncertainty. In this challenging environment, it is encouraging to see the Bank of England taking decisive action to boost the economy.

“This is the first time interest rates have been cut for seven years and brings rates to a new historic low. Lower rates should lead to cheaper borrowing costs, making finance more affordable and helping to support business investment. Small firms will also welcome the boost to household spending power and consumer demand.

“However, FSB members do have concerns about the longer term economic outlook. There is a real risk that sterling will depreciate even further, which could benefit the UK’s visitor economy and small exporters, but could also affect prices, inflation and investment. Medium-term forecasts indicate a slowing of the economy. We urge the Bank of England and the new prime minister to carefully assess the effects of today’s cut and do all in their power to boost economic confidence and growth.”

CBI chief economist Rain Newton-Smith said: “The combination of a rate cut and more quantitative easing should be a shot-in-the-arm for business and consumer confidence, lowering borrowing costs and keeping liquidity flowing through the economy.

“The Bank’s action will help restore confidence in the UK economy and what’s now most important to businesses is that the government develops a clear plan and timetable for EU negotiations. At the same time, it must press ahead with domestic policy priorities, especially infrastructure decisions, which will allow firms to get on with serving their customers and investing for the future.”

Commenting on the cut in interest rates, Dr Adam Marshall, acting Director General of the British Chambers of Commerce, said: “The unsurprising decision to cut interest rates reflects an increasingly uncertain outlook for the UK economy as the new government begins to look at our changing relationship with the EU. Lower interest rates may give a helpful boost to market confidence, but have little long-term effect on businesses when rates are already so low. What businesses want is low, stable interest rates for the foreseeable future, which will enable them to make their own growth and expansion plans with confidence.

“The additional measures – expanding QE, purchasing corporate bonds and the new term funding scheme – go beyond what many expected, but will be welcomed by business. The term-funding scheme in particular will help to ensure that businesses benefit from cheaper loans so they can invest and grow.

“Further rate cuts are unlikely to stimulate the real economy significantly, and also bring the threat of negative interest rates on businesses’ deposits, which will be of significant concern to some. Instead of further cuts to rates in the future, the Monetary Policy Committee should give careful consideration to developing the other measures announced in order to drive longer-term UK business growth. This could be through further purchases of business bonds, and expanding the scope of their intervention to include investments in the UK’s ageing infrastructure in key areas such as transport and communications.”