More lending not just cheaper borrowing, business urges

The Bank of England’s decision to lower interest rates to a new historic low of 1 per cent has been met with a mixed reaction from the business community.

While acknowledging that the Bank’s Monetary Policy Committee had little option but to reduce the cost of borrowing, several business groups argued that, with the recession deepening, other, less conventional measures need to be introduced.

The main worry of business organisations is not so much the cost of credit but its availability.

In presenting its case for a further 0.5 per cent rate cut, the Bank said that the move, combined with tax cuts and the weakness of sterling, should offer a “considerable stimulus” to the economy.

The Bank’s statement added that cutting interest rates would also help consumer price inflation return to somewhere close to its target of 2 per cent in the medium term.

Some analysts, however, have said that the effectiveness of interest rate cuts may now have been exhausted and that other measures should be considered, such as quantitative easing, which would see the Bank increasing the money supply through the purchase of assets like corporate bonds as a means of encouraging more business lending.

Business groups, too, want additional moves on the part of the Bank.

David Kern, the director general of the British Chambers of Commerce, said: “British business is not surprised by the MPC’s decision. With the recession worsening, and deflation a distinct risk, there is still scope for further interest rate cuts in the next few months, to almost zero.

“But, with rates at very low levels already, the focus of UK monetary policy must now inevitably shift towards forceful quantitative and credit easing measures, with the aim of increasing the money supply and removing blockages in the credit markets.

“Given the Bank’s unduly cautious record in the early stages of the credit crisis, UK businesses must be reassured that the Bank will be prepared to implement unconventional techniques.”

The limits of a sole reliance on rate cuts was a point also made by Jane Milne, the business director of the British Retail Consortium.

Ms Milne commented: “Interest rate cuts are not the only tool to fix the recession. The key issue now is not the cost of credit – but its availability. The BRC’s Shop Price Index shows the weakening pound is feeding through to the cost of imports and some shop prices.

“The Bank of England faces a fine balancing act between further weakening sterling and attempting to revive the economy. What we need now is better access to credit and a boost to consumer confidence.”

The CBI urged the government to intervene in the lending markets as a way of stimulating credit but also argued the case for a method that would not increase the money supply and so risk fuelling inflation.

Ian McCafferty, the CBI’s chief economic adviser, said: “This drop in rates should support business confidence and, when added to recent cuts of the past couple of months and the fall in the pound, provides a very significant stimulus to the ailing economy.

“But at these very low levels of interest rates, and with the credit mechanism still impaired, it is vital that the Bank swiftly supplements this move with direct intervention in the corporate lending markets. Sterilised intervention will help ensure that business is able to obtain the credit it needs to ride through these difficult times, without increasing the money supply.”