Tag Archive | "interest rates"

Will the base rate remain at 0.5% for the rest of 2011?


Savers and online accountants who have been hoping to see the Bank of England’s MPC raise interest rates sooner rather than later will be dismayed to learn that the Institute of Directors has said there is no case for rates to rise this year.

It said that it would be an unprecedented move to raise rates when the broad money supply was not experiencing double digit growth. Furthermore, a rise now could plunge the UK back into recession.

The BCC and the CBI both supported the decision to keep the base rate at its historic low 0.5% at the last MPC meeting.

David Kern, the BCC’s chief economist, said the MPC was right to keep the base rate down in order to help the fragile economic recovery and relieve some of the pressures both individuals and businesses are currently facing.

He went on to point out that the MPC is concerned about the current high rate of inflation and the prospect that it may rise further in coming months. However, it would be a major mistake to tighten policy at this stage. Increasing the base rate prematurely could damage economic growth and lead to more redundancies.

He added that the MPC could consider increasing the quantitative easing programme if the economy were to weaken any further.

The CBI’s chief economic adviser, Ian McCafferty, said the MPC was in a difficult position and will have to draw a fine balance over the coming months. However, he feels that if inflation reaches 5% by the autumn, the MPC might consider a change of policy before the year ends.

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Banks must treat small businesses fairly says Oakeshott


Accountants for contractors and other small business owners might be interested to hear that Lord Oakeshott has accused the banks of treating them unfairly.

The former Lib Dem Treasury spokesman pointed out that there are large discrepancies between the interest rates charged on loans to large organisations and those levied on small businesses. Figures from the Bank of England show that big firms pay an average rate of 1.78% on a £20 million loan and yet a smaller loan of £1 million would attract a rate of around 3.69%.

Lord Oakeshott would like to see the government put immediate pressure on the banks to rectify this situation and show that it is serious about helping small businesses lead the economic recovery.

One bank that it trying to do its bit is Spanish based Santander. Last week, the bank announced that it had secured £150 million from the European Investment Bank so that it can provide loans at discounted rates to firms with less than 250 employees. Funds are available immediately for companies requiring a loan of up to 12.5 million Euros over a minimum period of two years.

Santander has already pledged to increase lending to SMEs by 25% this year. The bank is increasing overall lending by £6.7 billion and £4 billion has been set aside for small and medium sized enterprises.

115,000 SMEs in Europe benefited from funding from the EIB last year and 30 billion Euros have been lent to European SMEs over the last three years, of which 2 billion Euros went to small businesses in the UK.

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Rainy day savings are making a comeback


The recession has fuelled an increase in rainy day savings, according to Jonathan Davis, an economist at Jonathan Davis Wealth Management.

In fact a recent survey from Mintel found that around 43% of Britons have prioritised saving for a rainy day this year, up from just 15% last year.

Davis said the credit crisis was a wake-up call for a lot of people, who realised that for the last ten years they have based their life on debt.

This is a little like closing the stable door after the horse has bolted but it is still encouraging that people are now looking to give themselves a financial cushion in case of a disaster such as redundancy. Savers should have a reserve fund equal to at least six months average spending, to get them through unforeseen difficulties, advised Davis.

Although rainy day saving may be on the increase, few people are saving for their retirement and this is of paramount importance, the expert added.

Savers may not be so happy to learn that the Bank of England has forecast that inflation is going to stay above its 2% target well into next year. Currently the CPI is standing at an annual rate of 3.1%, meaning a basic rate taxpayer needs a savings account that pays at least 3.8% in order to protect the value of their investment.

Now could well be the time for contractors to sit down with their contractor accountant and take a good look at incomings and outgoings and decide how to maximise your assets.

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Choppy recovery but little risk of a further credit crunch


The August Inflation Report from the Bank of England, which was published yesterday, was not as optimistic as contractor accountants might have hoped.

Mervyn King, the Governor of the Bank of England, warned that the economy faces a choppy recovery over the next couple of years. The Bank has said they expect inflation will remain higher for longer than they had previously anticipated and this has led to a lowering of the economic growth forecast. The report also suggests that interest rates will remain at their historic low in the immediate future.

Previously, the Bank had expected to see growth of around 3.4% in 2011 but this has now been revised to around 2.5%. The main reason for the revision is the coalition’s decision to increase the VAT rate to 20% as from the beginning of next year.

Mr King pointed out that the continuing economic stimulus measures along with the drop in value of the pound were helping the economy to expand but this is being offset by the lack of lending from the banks, something that affects contractors.

However, King did stress that the cost cutting plans put in place by the government have reduced the risk of a double dip recession.

Economists were quick to comment with some saying the report was more ‘dovish’ than had been anticipated. Howard Archer, from IHS Global Insight, said the report reinforced their view that interest rates will remain at 0.5% until early in 2011. He forecasts that we will not the first rise in rates will until the summer next year.

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Online accountants in for a rocky ride


Contractor accountants should take note that the CBI warned recently that although the economy has been showing signs of improvement, challenges and uncertainty still lie ahead.

The comment came after the Bank of England decided to maintain the historically low interest rates at 0.5% last week.

The head of economic analysis at the CBI, Lai Wah Co, said that although the move was widely expected, there is growing disparity amongst members of the Monetary Policy Committee over the strength of the economic recovery.

GDP has increased by 1.1% in the past three months according to government figures but this is expected to slow down during the second half of 2010. The recovery is being supported by an exceptionally loose monetary policy and it may be sensible to move towards gradually withdrawing this monetary stimulus, the CBI expert remarked.

Meanwhile, the majority of the UK’s small businesses and limited company contractors have still not returned to pre-recession levels of profitability. 70% of British entrepreneurs have not seen their profits return to normal after the credit crisis, according to RSM Tenon’s Business Barometer.

9% of entrepreneurs believe they will have to wait for at least another 3 years before their business returns to normal, 20% think between 2 and 3 years and 27% say 1 to 2 years.

Over 40% of entrepreneurs have had to review their business through fears of a double dip recession and 22% think that a lack of cash flow could seriously threaten their operation in the coming 12 months.

The head of recovery at RSM Tenon said that they are expecting to see corporate insolvency levels remaining the same as over the past two years as business owners still struggle to secure additional funding.

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Contractors want alternatives to rate rises


There are concerns that plans to raise interest rates to 3.5% could have an adverse affect on contractors who operate as limited companies. The OECD urged the Bank of England to urgently implement such a rise at the end of May.

R3, the insolvency trade body, says that if interest rates rise by between 1.5 and 3%, 7% of SMEs believe they would become insolvent. This rises to 18% if rates are set between 4 – 5%. Interest rates are currently 0.5%; an all time low.

Increased interest rates would be a double blow for businesses that rely on consumer spending to repay their business bank account loans. Any increase in the cost of borrowing regardless of whether it’s used as working capital or to enable business growth will pile increased pressure on highly geared businesses.

Research by R3 shows that the sectors most likely to be hit by an increase are retail and hospitality. Almost 33% SMEs in those sectors believe that any interest rate rise could lead to their demise. However, small businesses operating in construction and manufacturing are more confident that they could cope.

The outlook for retailers is already looking shaky as many are expecting the Chancellor to raise the VAT rate to 20%. The BRC recently warned that 163,000 jobs would be lost over the coming four years if this change takes effect.

The chief executive of Kingfisher, Ian Cheshire, has called on the government to increase the range of products that attract VAT, rather than increasing the rate. Books, newspapers, children’s clothes and most food are currently zero-rated.

However, Justin King, the chief executive of J Sainsbury, says that such a move would harm low income families who spend a large proportion of their income on food.

With the emergency budget just two weeks away, it looks like George Osborne has some very tough decisions to make if he’s going to reduce our fiscal deficit.

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