All eyes on lenders now |
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| Written by Gary Howes | |
| Thursday, 04 December 2008 | |
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As the Bank of England cuts rates to 2% we ask - how will lenders react and will the Pound plummet? The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 1.0 percentage points to 2.0%. This afternoon all eyes will fall on the banks and financial institutions tasked with passing the benefits of cheaper credit on to consumers and struggling UK small business.Despite the actions taken to raise bank capital, ease funding and improve liquidity, conditions in money and credit markets remain extremely difficult. The Bank noted that it was unlikely that a normal volume of lending would be restored without further measures. Responding to the Bank of England’s cut in interest rates of one per cent, Federation of Small Businesses National Chairman John Wright said: “This historic rate cut sends out the right message to the banks to lend fairly to small businesses. One in three of our members are still reporting trouble accessing finance so this move is very welcome. The burden is now on the banks to pass this cut on to their customers. This cut will provide a welcome piece of mistletoe to give a kiss of life to the economy when it needs it most.” According to the Bank business surveys have weakened further and suggest that the downturn has gathered pace, and this provided compelling evidence to cut the rate further. Indications that consumer spending and business investment have stalled, while residential investment has continued to fall provided the Bank with further motivation. Pound won't be happy Richard Curr of forex broker Blue Index said the rate cuts "are bound to put considerable pressure on the value of sterling", and warned the pound could slump to $1.30 against the dollar and to parity with the euro. Prior to the cut the pound continued its relentless slide against the dollar today ahead of a sharp cut in UK interest rates. Sterling fell 1.23 cents to $1.4647, and has now lost more than a quarter of its value against the greenback since peaking above $2 in the summer. The bank, in their statement on the rate cut, sought to emphasise a falling pound is not their key concern: "Activity indicators in the rest of the world have also weakened, though it is the Banks belief that the further depreciation in sterling should moderate the impact of weaker global growth on the United Kingdom." And finally the Banks take on inflation: "CPI inflation is likely to continue to drop back as the contributions from retail energy and food prices decline. The direct effect of the temporary reduction in Value Added Tax will also lower CPI inflation through much of next year, with a corresponding increase in inflation in 2010."
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