Will Interest Rate Cut Support Small Business?

FSB warns that a further interest rate cut will not work

The Federation of Small Businesses (FSB) is calling for the Bank of England (BoE) to hold fire on any further interest rate cuts ahead of the Monetary Policy Committee's decision on Thursday (5 February 2009).

Figures from a survey of over 4,000 small businesses show that the recent rate cuts have not provided the boost to the economy that many hoped for.

According to the poll almost two thirds (63 per cent) want the BoE to keep rates at their current level of 1.5 per cent. Only a quarter (24 per cent) said they would like a rate decrease – down from 58 per cent who called for a rate cut in a similar survey conducted in December 2008.

This indicates small businesses are not feeling the impact of the interest rate cuts and that access to finance, rather than the cost, remains a key problem.

John Wright, FSB National Chairman, said:

"These figures suggest that the recent interest rate cuts are not having the desired effect and other means of economic stimulus are required.

"Small businesses are clearly worried that this monetary policy has been used extensively over the last few months yet they are still struggling to access cheaper finance.

"The concern now is that if rates are cut any further there may not be too much more room for manoeuvre in the economy. The onus is really on the banks to start promoting these lower rates to fire up the economy."

David Kern, Chief Economist at the British Chambers of Commerce (BCC), said:

"British business is not surprised by the MPC’s decision today. With the recession worsening, and deflation a distinct risk, there is still scope for further interest rate cuts in the next few months, to almost zero.

“But, with rates at very low levels already, the focus of UK monetary policy must now inevitably shift towards forceful quantitative and credit easing measures, with the aim of increasing the money supply and removing blockages in the credit markets.

“Given the Bank’s unduly cautious record in the early stages of the credit crisis, UK businesses must be reassured that the Bank will be prepared to implement unconventional techniques. This is vital in order to alleviate the recession, counter threats of deflation, and underpin falling confidence.”