UK banks must heed most significant interest rate cut in a generation, says business lobby group

The Forum of Private Business (FPB) is urging the UKís banks to reduce interest rates in line with the Bank of Englandís decision to cut the cost of borrowing by 1.5%, the largest reduction in a generation.

As was the case in October 2008, many commentators expected a cut closer to 0.5%. However, the Bankís Monetary Policy Committee (MPC) has gone even further and dropped the base rate by an extra per cent, a move not seen since 1981.

The base rate has dropped by 2.75% from 5.75% over the past 12 months, but the latest 3 month LIBOR rate shows a reduction of just 1.05%, from 6.61% to 5.56%. Phil Orford, Chief Executive of the FPB, said the decision would boost the confidence of business owners, but only if the banks were pressured to follow suit by passing on the cut in full.

The banks must now embrace the Bank of Englandís decision when determining their inter-bank lending rate policies, said Mr Orford. A cut in the 3-month LIBOR rate would lead to a reduction in interest rates for small businesses and property purchasers, and improve the availability of cash-flow based finance for small firms.

Mr Orford said that the signals sent out by recent changes to mortgage lending rates were ëvery worryingí, with evidence that lenders, attempting to offset the effects of cuts in interest rates, have removed tracker rates and raised the tracker margins by 0.5%.

The fact that the cut in interest rates is not being passed on to borrowers and is instead being absorbed into lendersí profitability means that not only are lenders taking advantage and profiteering, but they are blatantly ignoring all pressure to improve lending provision, he said.

The FPB believes this cannot be allowed to happen within the small business lending market. A 1.5% cut in interest rates is welcome and acknowledges the seriousness of the economic situation for small firms. Now the financial and banking sector must embrace the clear signal given by the Bank of England and do the following:

Pass on this reduction, in full, to small businesses by reducing overdraft rates today.

Stimulate access to finance for small businesses by making it more attractive to borrow the money they need for cash-flow and short-term liquidity purposes.

Utilise this cut, together with the underlying financial guarantees provided by the Government, to recommence inter-bank lending at appropriate levels. This will facilitate a significant reduction in LIBOR rates and improve confidence substantially.

Adjust its risk profiles to take account of lower costs of borrowing by business owners.

In addition, mortgage lenders should:

Reinstate tracker rates and reverse recent increases in tracker rate margins to provide a stimulus to the housing market – this will improve economic activity as a whole.