Would an interest rate cut increase business confidence?
With the UK economy plunging headlong into a recession, is there anything that can be done to limit the resulting damage?
At present, the prospects look decidedly bleak. New research published by the British Chambers of Commerce – which carried out a survey of its 5,000 members, a number of whom are insurance brokers – revealed that more companies reported a decline in income in the third quarter of this year than reported a decline the previous quarter.
Meanwhile, business confidence appears to have evaporated – in the second quarter of this year, the majority of firms were confident about their profitability, but this is no longer the case. Most of the firms surveyed by the BCC during the third quarter of this year were not confident about the profitability of their business.
It’s all very worrying. The BCC itself found the results of its survey decidedly traumatic and described the statistics as “disturbing”. But let’s not descend into a state of panic. Okay, if a recession is on the way, the question now is how can we soften the blow? Well, a cut in interest rates would be a start and this is what businesses – and consumers – are crying out for.
Being a British organisation, the BCC has been keen to show a stiff upper lip despite the impending doom. David Frost, director general of the BCC, said this week that it was important to “retain a sense of proportion” in the midst of the difficult economic conditions. However, Frost also urged the Bank of England to “immediately” cut interest rates by half a point.
A half a point interest rate cut may restore some business confidence, but would it really be enough? The fact is that some economists very much doubt it. David Kern, who is an economic adviser to the BCC, argued this week that the Bank of England’s Monetary Policy Committee will have to cut interest rates much more drastically in order to avoid the danger of a deep recession that could cause “huge damage”. Kern said that, over the next four months, interest rate cuts should be cut to “four per cent as a minimum”. The MPC needs to act soon and it needs to act decisively.
