The recent cut in the UK base rate from 0.5% to 0.25% was taken to alleviate the effect of June’s Brexit vote which resulted in forecasts stating that the economy would shrink by 0.4% in the third quarter.
The results of a survey by the Federation of Small Businesses (FSB), which represents small and medium sized businesses in the UK, show that business confidence among its members was at a four-year low. The pessimism felt by many over the UK’s economic outlook will be hard to shift, so how will this cut in interest rates affect small businesses?
Access to finance is an issue faced by many start-ups and small businesses. The FSB survey cited that only 16% of their members reported applying for credit in quarter 2 of 2016. Cheaper borrowing should offer encouragement to these businesses to apply for funding and enable more start-ups to get off the ground. Banks have been told that they must pass on these lower borrowing costs to their customers and the 'Term Funding Scheme' recently announced will provide cheaper lending to banks to enable them to do this.
A survey conducted in July by market research institute GfK showed consumer confidence to have plunged to its lowest since 1994. Consumers are cutting back on spending on non-essential items which could impact on businesses operating in the fashion, travel and lifestyle sectors. The cut in interest rates may help in some way towards alleviating the fear felt by many UK consumers since Brexit and improve consumer spending, and with no benefit for savers they may well choose to spend their money. The hope therefore is that many UK small and medium sized businesses should see an increase in consumer spending on their products and services.
While many small business organisations welcome this cut in the short term, they have also voiced their concern for the long-term outlook. Despite the package of measures announced by Mark Carney, there are still many experts who believe that businesses won’t borrow and consumers won’t spend in these uncertain times.
On the same day as the announcement on interest rates was made, the Prime Minister hosted a Small Business Summit on Brexit where she heard from representatives of the UK’s small and medium businesses. The Government will set out its spending plans in the autumn as well as it’s time table for Brexit. Both businesses and consumers may adopt a ‘wait and see what happens’ stance until then.
By Greg Thomas, director of MiVentures