Groups call on Banks to cut costs


Business groups have welcomed the recent 1.5% Bank of England (BoE) interest rate cut, but warned that banks must reduce their borrowing costs for small firms to benefit.


The BoE’s decision to cut interest rates from 4.5 to 3% has provoked a positive reaction from business groups concerned about the effects of the economic crisis.

The Federation of Small Businesses (FSB) national chairman John Wright said that if the banks pass on the rate cut in full, it would result in a £750 million saving for small firms on the cost of their overdrafts and other loans.

“All this will come to nothing if the banks do not follow through and pass on the rate cuts to those small firms struggling with increased costs of credit,”

Forum of Private Business chief executive Phil Orford said the rate cut would boost the confidence of business owners, but only if the banks passed it on in full.

“The banks must now embrace the Bank of England’s decision when determining their inter–bank lending rate policies. A cut in the three–month LIBOR rate would lead to a reduction in interest rates for small businesses and property purchasers, and improve the availability of cashflow–based finance for small firms.”

However, British Chambers of Commerce chief economic adviser David Kern sounded a note of caution regarding future rate cuts.

“We support the decision to cut rates by more than analysts expected. But we believe the Monetary Policy Committee [MPC] should move much more steadily and deliberately and avoid too many lurches towards emergency measures.

“These have the undesirable affect of unsettling the markets and undermining confidence. Using up all their bullets prematurely will leave the MPC with little scope to inject confidence through continued rate cuts when the recession deepens.” added Kern.

While some high–street lenders have appeared reluctant to pass on rate cuts to domestic mortgage customers, the British Banking Association said that businesses should be quicker to benefit. BBA spokesman Paul Ross said:

“Many small businesses’ credit comes from simple overdraft facilities, with rates directly linked to base rates, and reductions should already have kicked in. Other forms of lending tend to be arranged differently, so it’s not possible to benchmark how easily rate cuts will get passed on.”

For more information on looking after your finances, read our managing your cashflow article.

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