Monday, 5 September 2016

Too quick off the blocks?

The interest rate cut by the Monetary Policy Committee of the Bank of England didn’t come as a total surprise, like Usain Bolt’s triple-triple - but some of the BattleAxe’s grumpier interlocutors have been wondering if it may just prove to be a false start.

The MPC’s reasons sound sensible after our Brexit vote.  There are genuine fears, from some, of a downturn and job losses resulting from that vote.  Cutting rates is a classic ploy to encourage businesses to keep investing and spending, by showing they can borrow cheaply.  

However: what message is this sending out so soon after the vote?  Yes, after a lengthy and bitter campaign, the economy might have been expected to take a bit of a wobble.  Some people seemed genuinely amazed on June 24th that the lights came on, buses ran and overseas companies were still buying from the UK! 

The grumblers’ nagging doubt is that cutting rates right now suggests the UK is panicking or a sign of an economy that is out of control.  Both would be somewhat at odds with the latest figures on employment and consumer spending – like suggesting GB’s women’s 470 sailors or Giles Scott would fail to medal with just the last race to go!

Only time will tell how Brexit will actually impact the economy.  So far, the noises on trade deals from non-EU countries have been very positive.  Lower sterling makes imports more expensive but also makes exports cheaper, fuelling British exporters. They may need to reset sights to trade more actively with the 85% of the global economy that’s outside the EU. However, if we produce goods the world wants at the right price, that gives us profits to pay for those imports.

The other question is, will the base rate cut actually make any difference?  Well, of course, it depends on who you are! The drop may be raising smiles from people with mortgages, but they are LIBOR linked nowadays, so the cut may not lead to a wholesale drop in lending rates.  After all, the banks are already muttering more loudly about low margins than some countries have been about our success in the velodrome. 

Sadly, savings rates are almost bound to drop – thank goodness Mark Carney has come out against negative rates where you end up paying just to leave your cash in the bank!  That’s as attractive a concept as Yorkshire coming outside the top 20 in an Olympic medal table….

This article originally appeared in Huddersfield Examiner Kirklees Business News on 5th September Titled What Message Does This Send?