BUSINESS breathed a sigh of relief yesterday as the Bank of England trimmed interest rates by a quarter point.
Despite concerns about rising inflation there was a warm welcome for the widely expected cut to 5.25% to calm worries about looming recession.
The Bank said: “The prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued. In the UK, credit conditions for households and businesses are tightening. Consumer spending growth appears to have eased.”
The move comes a fortnight after the US Federal Reserve tried to soothe stock market tumult by slashing the US rate by a three-quarter point.
There was a broad welcome that the Bank had decided to act before the UK economic slowdown deepened.
Alan Hall, EEF Northern director, said: “The evidence from the past month points to a growing risk of a weaker economy. While the Bank is right to keep one eye on inflationary pressures, business will welcome the current measured and gradual approach to reducing rates.”
Richard Bottomley, president of the North East Chamber of Commerce and senior partner at KPMG in Newcastle, said: “While we are not surprised, we are pleased that the Bank is ensuring confidence remains high.
“For a while now, North East businesses have responded robustly despite grim news from the US and the latest rate cut will continue to aid exporters and manufacturers. As a region we are performing well and NECC is keen to see that positive picture continue.”
Sarah Green, CBI North East regional director said: “The Bank’s own forecast in November suggested two rate cuts of 0.25% would be required to meet its inflation target in 2009, and this cut brings the base rate down towards a more neutral position. This should help ensure that there is a soft landing to the slowdown now under way.”
Richard MacAlister, divisional director of stockbrokers Brewin Dolphin, said: “Given the current state of the economy there is an understandable view that, at present, the MPC should worry less about inflation and more about achieving growth, so the pressure to reduce interest rates further remains.”
John Wright, Tees Valley-based chairman of the Federation of Small Businesses (FSB), said: “Most small businesses prefer to operate in a stable economic climate that is not subject to steep fluctuations in interest rates. A quarter point decrease is the correct move at this stage.”
Michael Poole, Middlesbrough-based vice-chair of the North East branch of the National Association of Estate Agents, said the cut would not make a significant difference to monthly mortgage repayments but would restore confidence among businesses and consumers.
“Borrowing money in the UK is still relatively cheap,” he said.
The Bank of England added that while inflationary pressures are an immediate concern, the Consumer Prices Index was set to come down later in the year, but the lower level of sterling was likely to help importers.
Retailers welcomed the decision and urged rate-setters to make further reductions over the coming months.
Page two: Former Wall Street and City economist Ian Shepherdson gives his verdict on the interest rate cut.
In Trouble on all fronts
The Bank of England’s quarter-point cut in interest rates yesterday will make no difference at all to the performance of the economy in the near-term.
Mervyn King wears glasses, but his similarity to Harry Potter ends there. The Monetary Policy Committee has no magic wand, just a sparsely-equipped tool box with which to fix the economy.
The problem is that the single tool in the box, interest rates, work very slowly.
Even under ideal conditions, the benefits of lower rates tax at least six months to have any effect, and the wait is often double that.
This means that whatever bad news is in the system now will take most of 2008 to be flushed out, regardless of whether the Bank continues to cut rates over the next few months.
But even if Mr. King and his colleagues were to start competing with the US Federal Reserve in the Global Fastest Rate Cut Challenge, businesses would still have to brace themselves for a very tough year.
No-one can be in any doubt now that the economy is in trouble on all fronts.
Manufacturing output has fallen in recent months, while the chaos in the markets, coupled with the realization that the housing boom is now as over as NUFC’s season, means that consumers’ confidence is fading fast. That signals pain for retailers and a squeeze on service sector businesses like hotels, restaurants and leisure operators. As a rule, miserable people buy less stuff, go out less and take fewer holidays. When the economy stalls, spending on entertainment has to take second place to the mortgage payment.
And there’s the rub.
With house prices still at stratospheric levels, despite their recent drop, people are saddled with mortgage payments which, by historic standards, are enormous in relation to their incomes.
That was just fine as long as the housing boom continued.
All you had to do to finance your leisure spending was just shake the curtains and watch the money came tumbling down in the form of equity withdrawal. Even for non-homeowners, credit had never been easier to find. Not any more.
With banks now determined to pick and choose their borrowers, we have to relearn, collectively, how to live within our means.
That includes the government which is now more or less broke, thanks to the profligacy of “prudent” Mr Brown – as prudent as a drunk in a betting shop, I’d say. Taxes now need to rise in order to meet the Government’s own rules, so Mr Brown is in no position to do what the Americans are about to do, namely, throw a huge pile of cash at the problems in the economy.
If it’s any consolation, the tax cuts in the States won’t fundamentally sort out their problems, which are rather deeper than ours, but it would be nice if the UK. government were in a position to give it a shot.
Rules are made to be broken, of course, especially when they get in politicians’ way, but all the same you should not be looking to the Government for salvation.
At least in this part of the world we have plenty of experience on that score.
Tin-hat time, I’m afraid.
Ian Shepherdson is a former Wall Street and City economist
now living in Newcastle. email@example.com