Banks must pass on rate cut says city business leader

Oct 8 2008 By Tony McDonough

A LIVERPOOL business leader is today welcoming the half point cut in interest rates but says the banks now have to do their bit to help suffering small businesses.

In a dramatic and unprecedented move earlier today, the Bank of England joined six other central banks across the world and cut the rate from 5% to 4.5%.

The US Federal Reserve has cut rates from 2% to 1.5% and the European Central Bank (ECB) trimmed its rate from 4.25% to 3.75%.

The central banks of Canada, Sweden and Switzerland all took similar action in the co-ordinated move.

However, stock markets around the world are continuing to fall despite the move. This afternoon the FTSE 100 Share Index was down around 4%.

Lloyds TSB announced today that it would be passing on today’s unexpected cut in interest rates to mortgage customers in full.

But other banks appeared to have been caught by surprise by the Monetary Policy Committee’s decision to announce the outcome of its rate-setting meeting today rather than tomorrow.

All of the UK’s other major lenders, including the biggest lender Halifax, said they currently had their rates under review.

Frank McKenna, chairman of business lobby group Downtown Liverpool in Business (DLIB), told LDP Business he was now seeing hard evidence that the credit crunch was hurting the small business sector and he urged the banks to start lending again quickly.

"Businesses need cashflow in order to operate and we are now seeing firms have their overdraft facilities reduced and their credit lines stopped.

"We have had direct contact in recent times from two of our members in this position. If you replicate that across Merseyside there is potentially a huge problem.

"This interest rate cut is good news but only if the banks are prepared to pass it on.

"It was the actions of the banks that got us into this mess in the first place and now it is their actions again which is making it worse.

"What they need to do is start being a little bit more entrepreneurial than they have in the past few months."

Les Staniforth, corporate finance partner at Liverpool’s Duncan Sheard Glass, believes today’s rate cut will be the first of several, but doesn’t think businesses will see the benefits immediately.

He said: “The co-ordinated European and American interest rate cuts are a timely response to the unprecedented economic circumstances.

“I would fully expect to see further rate cuts in due course but it will take some time before any beneficial effects are felt by businesses and individuals in the real economy.

“We may well be heading, in the coming months, towards a situation where we have historically low interest rates as the MPC attempts to stave off recession.”

A leading Liverpool accountant today told LDP Business we were now in the "last chance saloon" in terms of what else the Government and the Bank of England could do.

Neil Sturmey, managing partner at accountants Grant Thornton in Liverpool, added "The same-day response to the financial crisis from the Bank of England and HM Treasury is certainly unprecedented and let’s hope this has the desired impact. It must work as there is not much left in their armoury.

"Higher levels of public funding to further recapitalise the banks, guarantees on all deposits of both business and consumers, and more cuts in interest rates are the only weapons left to deal with what is now an old fashioned banking crisis in a modern global economy.

"The key now is for the markets to respond to this intervention with reason and a measure of realistic optimism. We must now begin to help talk ourselves out of a recession, as we certainly have helped talk ourselves into one."

A former colleague of Mr Sturmey, Howard Hackney, said today's interest rates decision, announced directly by the Government, also brings into question the genuine independence of the Bank of England. He also added a note of optimism.

Mr Hackney, who now runs the boutique practice Howard Hackney LLP, said: "When the chips are down you have to wonder whether out central bank really is truly independent. I think the one other big thing the Government should do is guarantee all deposits.

"We are now in extraordinary times and there is clearly a drying up of credit. However, I believe there is still plenty of life in the real economy and deals are still being done.

"The other worry for people is the effects of plunging stock markets on pensions because I think the FTSE still has further to fall to maybe around 4,000 points."

Federation of Small Business Merseyside, West Cheshire & Wigan Regional Chairman, Norman Lay, said: "This should be very helpful to Britain’s small businesses but the welcome cut will only come into play if the banks follow through and reduce their charges to small businesses accordingly.

"We would urge the Government, now that it has a stake in the banks, to ensure all base rate cuts announced by the Bank of England are honoured by the clearers."

tonymcdonough@dailypost.co.uk