The Bank of England Monetary Policy Committee’s decision to cut the base rate from 0.5% to 0.25% sends a clear message that things are not well with the economy, and that something needs to be done in the wake of Brexit.
Yet you have to question whether it has acted too quickly, and removed some of the weapons in the armoury if things do not pick up as expected. There is no doubt that Britain’s economy is slowing in the wake of Brexit. The uncertainty that the ‘Leave’ vote has created is not going away quickly, and the longer it takes for Britain to move in whichever direction it chooses next, the more concern there will be.
Cutting the base rate pushed markets higher, with the FTSE 100 boosted by 1.59% to close at 6,740 points, but the pound plunged on the news, falling by around 1.6% against the US dollar, and tumbling to €1.18 against the euro. It is nice to see the bigger companies getting a boost to their share price, but what will this mean to smaller businesses?
Well, in the short term probably not a huge amount. As with any big changes of this nature, the actual benefits or otherwise of a base rate change will take time to filter through, and making sure you are ready to take advantage of the change is a good idea. The BoE cut the base rate because it wants to boost the economy, make borrowing cheaper for both businesses and consumers so more is being spent on goods and services. It is a tried and tested formula that has worked for decades, and the Bank has acted quickly this time to try and stave off a recession like the one we saw in the credit crunch.
However, my concern is that this time there is an external force which is preventing people and businesses from making decisions on spending – the actual pace and shape of the UK leaving the EU. Uncertainty is great at making people stand still because they do not know exactly what to do for the best. If you are not sure what is coming, the most likely thing for people to do is nothing, and it is more likely that you will stockpile cash that you have rather than look to increase your borrowing, unless you are sure that Brexit is a good thing for your business.
If you are and you need to borrow, then the other parts of the economic stimulus announced by the BoE governor yesterday are likely to play into your hands – including a £100 billion Term Funding Scheme particularly which should allow the banks to lend to businesses more effectively because they can borrow from the BoE themselves at a rate of around 0.25% for four years. That is, of course, assuming the banks do the right thing and pass this onto businesses and do not use it simply to boost their own profits. Time will tell.
Certainly the falling pound will make it harder to buy goods and services from overseas at a reasonable price, and if you regularly import goods then you should consider using a currency broker to help you get the best rate on your international money transfers.
Smaller businesses need to take stock quickly in the wake of the base rate cut to see how they can use it to their fullest advantage, and that might mean taking a risk to grow your business for the future. Just make sure it is a calculated risk.
By Ali Steed, founder of The Business Powerhouse