UK Interest Rates Drop to 1%

interest rate cut

The Bank of England cut interest rates to 1%.

Before the decision there was much conjecture whether interest rates would be frozen or cut.

The Federation of Small Businesses (FSB) was amongst those that favoured the rates to be kept on hold.

It argued that what was needed was improved access to capital.
A survey of its members found that 63% wanted rates to remain at their current level, compared with only 24% who wanted a further cut.

Talking to the BBC, FSB national chairman John Wright said

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

Echoing these comments, Andrew Sandiford – Partner at the progressive accounting firm Target – said:

“Any further reduction is to be welcome, assuming it gets to business customers.

However, the rate is no longer the key issue. What matters is availability of credit, at a sensible price without unrealistically onerous covenants. It is now time for Government rhetoric to filter through the bank branches and into the real SME economy.

Isn’t it about time that the government started to show the tax payer what they are getting for there stake in the banks?”

We see lower interest rates provide the following opportunities for SMEs;

  • Re-capitalisation. Don’t be shy to go and see you bank and look to re-capitalise your business. With low rates, you can inject some cash, solve some problems, buy time, possibly even gain a competitive advantage.
  • Switch debt. If you are carrying credit card debt on high finance rates or vehicles on other short term finance that is fixed at high rates, perhaps consolidating your debt into a longer term position with low interest rates will help ease cash flow in the short term.

As we are in uncertain times, you really need to know your cash position and keep a very close eye on your cashflow. Do your bank reconciliation daily. Check and chase down your debtors daily by sending them statements and calling them.

If you are planning a visit to your Bank Manager to adjust your lending structures, then show him/her Xero and run through the reports.  This will help provide confidence that you know your numbers.


Mark Johnstone - Argents
February 6, 2009 at 10:38 pm

There comes a point, and to be honest I thought we were there before yesterday, where interest rate cutting will have no more effect on the people’s expectations and perceptions. Everyone thinks things are bad at the moment therefore they are. The unprecedented level of uncertainty in the UK and world economies highlighted by the business failures of banks and other financial institutions has everybody very worried. In that climate we are not going to spend money unless it is essential, we are not going to look to borrow money now even though it is, by historical standards, very cheap when we would rather wait and see how things develop over the next 12 months or so. And of course banks will only be willing to lend money to businesses in significant enough volumes to stimulate growth and activity once they feel comfortable lending to and from each other again and this will take some time. To my mind this is where government should be concentrating their efforts to try to ensure banks and other lenders start behaving in the way they were always intended to.

Martin Gatehouse
February 10, 2009 at 12:28 am

A big reason for cutting interest rates is to stimulate consumer spending in order to stave of deeper recession.

Unfortunately it takes time to work through as a significant proportion of morgage borrowers are tied into fixed rate deals.

More-over, the intra-bank lending rate is preventing some of the falls from being passed onto borrowers with variable/tracker deals.

However, I am convinced that consumer spending is positively affected by the rate cuts.

The key factor in 2009 will be unemployment levels and the ‘fear factor’ of losing jobs. Until that settles, things will be tough genrally.

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