What Does The Base Rate Cut Mean For SMEs?
The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy in an aim to meet the 2% inflation target, and of course in a way that helps to sustain economic growth. As we’re aware at the August meeting, the MPC voted for a package of measures designed to provide additional support to growth, one of which was to cut the base rate to 0.25%. The decision was in line with expectations, as it was designed to also counteract the impact of the economic uncertainty following the vote to leave the EU.
High Street Bank Base Rate have also been lowered to 0.25% with immediate effect. This could have a number of implications for small and medium enterprises. For example, if you have a loan where the interest rate is directly linked to the base rate, or your borrowing is linked to other variable rates, you should see a reduction in your interest payments. This could give you more cash to invest in future improvement and growth.
Where you’ve borrowed at a fixed rate for a given term, however, the interest you’re charged will remain unchanged until the end of that term.
Meanwhile, the adverse effect is that interest rates on any savings deposits may be reduced too.
Another potential impact is that SME’s should also look to see if they can negotiate improved terms of credit from their suppliers. The lower cost of borrowing may lead to cheaper products and services. That’s because lower rates can make the funding of business operations less expensive. Cheaper products could in turn lead to more disposable income for both consumers and businesses, potentially resulting in a boost to sales and new opportunities for growth.
On the news to cut interest rates, even though it was in line with expectations and thought to be priced into the currency markets, the pound did weaken. For the economy, an interest rate cut is seen as a positive for the long term; exchange rates are priced in the short term! If the pound weakens further off the back of the interest rate cut, exports could consequently become even more competitive in foreign markets. Of course, if your business imports products, a weaker pound could make these more expensive.
Working to protect your clients exposure to currency fluctuations in the future is a very important topic and definitely should be considered as the uncertainty for the future continues. Markets will digest the base rate cut and over the coming weeks and months and the real impact on SME’s will be clearer.