The Bank of England’s interest rate cut to 0.25% was designed to boost growth – but to what extent are banks passing on the reduction?
Small businesses were hoping to benefit from the cut and a £100bn monetary stimulus package providing cheap funding for banks. However, research from Moneyfact.co.uk has found that while 285 savings accounts cut their rates in August, Halifax and Nationwide have defied the Bank’s rate cut on tracker mortgages.
Banks are obliged to reduce interest by 0.25% on all variable rate loan products that track the Bank of England base rate, but changes to standard variable rate products and fixed rate loans will be at their discretion.
Independent adviser Victor Sacks is not optimistic about banks passing on the cut to customers. “Unfortunately businesses will still be at the behest of a bank to pass that rate down the line, which I can’t see a bank doing,” he says.
Lending in recent years has been cheap for small businesses due to an already low interest rate. Any cheaper lending is unlikely to spark a stampede in borrowing.
“From what I’ve experienced as a small business the bank rate cut means nothing,” says Colleen Wong, founder of children’s smartwatch firm Techsixtyfour. “As any small business you are not just going to borrow for borrowing’s sake.”
Sacks believes SMEs should be reviewing all costs, given the “huge variances” in the terms of different financial products. “Check out the best deals on everything because there is a really good chance you could start reducing your costs just by being a bit smarter,” he says. “The big banks may be great but there will be other, smaller, second tier banks that are looking to get a footprint into a particular sector or market and can do it at a slightly better rate.”
Precious Jason, who founded the skincare firm for cancer sufferers Etieno, using her own money and funds from friends and family, is looking at taking out a loan to expand the business. “It is something we are seriously considering because we are in the growing phase of the business, but we are also cautious of the Brexit implication,” she says. “I started off making the products from home and I think it is time to transition to our own premises so we would need to invest in that.”
Sacks highlights how any bank registered with the Post Office will have FSCS protection, which provides customers with peace of mind.
The drop in the bank rate has also meant banks are cutting their interest rates on savings accounts, so any small business owners with savings should review these. “Some consideration needs to be given to doing something with some of that money,” says Sacks, “rather than all of it sitting in a place where it will be ripped by inflation.”
Mutual funds could be a good option because many FTSE 100 companies declare their dividends in dollars, which means there has been an upsurge in fund values post-Brexit because of the fall in the pound’s value.
The key is to diversify: Sacks advises businesses should think of the British summer as a guide. “We would invest in ice cream and umbrellas for the British summer and your investment strategy needs to be the same thing,” he says. “Be broad and diverse and one of your pots of money somewhere will win.”
Flexibility can also be a boon to small businesses seeking to cope with the plunge in the value of the pound, which dipped significantly after the interest rate cut.
Wong’s company buys its smartwatches from China in dollars, and has sharply felt the drop in the pound. Fortunately, Wong has persuaded her UK distributor to buy from her in dollars. She is able to do so while still having British sterling come into the company from the service contracts she sells with the devices.
“Definitely look into various forms of hedging if you are an importer of any kind,” she says.
For those not in the position to have revenue streams in different currencies, there are other courses of action. Mark Horgan, chief executive of foreign exchange company Moneycorp, is unenthusiastic about the prospects of the pound until the terms of Britain’s EU exit are clearer. He is encouraging businesses to “lock in” an exchange rate with a forward contract. These allow businesses to agree an exchange rate in advance, guaranteeing a specific rate when the transfer is made.
Ian Sutherland, chief financial officer at personalised children’s book retailer Lost My Name, says hedging is something the company now thinks about much more. “We have been looking at future cash flows and whether we are paying our supply base in dollars or euros and based on that we might decide to lock in a certain exchange rate for the next 12 months,” he says. “We are typically not making massive bets on what is going to happen to exchange rates – but you want to be able to insure yourself against the exchange rate moving the wrong way.”
“Fundamentally, the pound’s value is determined by economic growth, interest rates and a view of the UK’s economic future,” says Mark Horgan, at Moneycorp. “Currently, all three are perceived to be negative, hence the continued devaluation of sterling since the end of June.
“These features should highlight to small businesses the importance of planning ahead to mitigate possible risks.”
Not all small businesses will lose out due to the drop in the pound and exporters, such as Lost My Name, which now has 85% of its sales coming from outside the UK, could benefit. “If the SMEs are exporters, now is a great time to build sales, as the pound is weak and UK-produced goods are competitively priced,” says Horgan.
The Federation of Small Businesses chairman, Mike Cherry, says it is encouraging to see the Bank of England take “decisive action” to boost the economy through the interest rate cut. Since many of these benefits rely on banks making borrowing cheaper, Cherry has called on Bank of England governor Mark Carney and prime minster Theresa May to “carefully assess the effects of the cut and do all in their power to boost economic confidence and growth”.
Small business owners would be wise to mitigate risk and seize any opportunities immediately, because the interest rate cut may not prove to be the hoped for panacea for the post-Brexit economy.
Sign up to become a member of the Guardian Small Business Network here for more advice, insight and best practice direct to your inbox.
