The Bank of England has cut interest rates to a record low of 0.25% – the first time in seven years that it has resorted to a reduction.

Interest rates have been cut to a historic low

Money

Interest rates have been cut to a historic low of 0.25%

The decision is a clear sign that the Bank is attempting to ward off the prospect of a recession by easing monetary policy and will spark hopes among retailers that consumers will save less and spend more.

After Bank governor Mark Carney officially unveiled the rate cut at midday today, Retail Week answers the big questions being asked across the industry.

How will the cut impact consumer spending?

Peel Hunt analyst John Stevenson says that although interest rate cuts may be seen in general as good news for household finances, he does not envisage the cut will make any difference to consumers’ shopping habits.

Stevenson says: “I don’t think the cut is going have any impact this time around. We are not going to see a big benefit in the way we did when rates were cut seven years ago. The journey down through interest rates since then has been significant for consumers, but when it gets to being as low as it is now it stops making much difference.”

PwC senior economic adviser Andrew Sentance agrees, branding the move as a “token gesture” which is “unlikely to help”.

“In 2017, we are probably going to see a contraction in living standards, where inflation creeps up and wages and salaries plateau”

Clive Black, Shore Capital

Stevenson argues that any benefit of the reduction may not even reach many consumers

He says: “I’d be very surprised if banks or building societies cut mortgage rates or pass this on to the consumer, because they are already so low.”

However, PwC partner Mike Jervis says that the effects might be felt by some, “especially those with tracker mortgages”.

Shore Capital analyst Clive Black says that the “miniscule reduction” will not materially impact consumer spending.

He says that the “prime driver” behind ongoing consumer spending is going to be the macro-economy, because this will ultimately impact employment, inflation and, consequently, spending. 

“It is going to be what happens to business confidence and business investment that will determine employment levels in the private sector and therefore determine how many people are in work and how much they get paid and spend,” he says.

Allied to that is what happens to sterling, which is currently down between 8-10% against the dollar and the euro.

Black says that, in time, the effect of the declining value of the pound will be inflationary.

”In 2017, we are probably going to see a contraction in living standards, where inflation creeps up and wages and salaries plateau. That’s when we’ll see changes in household expenditure,” he says. 

How will the rate cut affect consumer confidence?

“Where consumer confidence is concerned, it’s a double-edged sword,” Stevenson says.

“Despite reports of dramatic drops in consumer confidence in July, they haven’t actually changed their shopping behaviour”

John Stevenson, Peel Hunt

“On the one hand if the benefits of the cuts were to be passed on to the consumer, they will start to feel more confident. However, people may be worried that the measure of cutting rates has been taken once again and feel less confident about the wider economy because of that.”

He believes that, whether confidence goes up or down, retailers are unlikely to feel the impact in their tills immediately. 

He says: “If you look at how consumers are behaving, despite reports of dramatic drops in consumer confidence in July, they haven’t actually changed their shopping behaviour.”

How will it impact retailers’ borrowing?

At first glance, lower interest rates look like a much-needed boon for retailers with expansion plans. However, analysts were unconvinced that the reduction in interest rates would have much of a tangible impact on retailers’ propensity to borrow more from banks to fund their growth ambitions.

“I think that’s questionable with a 0.25% move,” says Black.

“Historically, cutting interest rates is not good for the pound. It’s not helpful from an exchange-rate perspective”

John Stevenson, Peel Hunt

“It’s more about whether retailers have the appetite to borrow and invest, rather than the banks having the willingness and capability to lend.”

The EU referendum result, which triggered the reduction in interest rates, has affected business confidence and made the trading landscape, at home and abroad, more uncertain and there are bigger concerns than interest rates, such as the value of the pound. In that respect the rate cut may not help much.

Stevenson says: “Historically, cutting interest rates is not good for the pound. It’s not helpful from an exchange-rate perspective.

“Retailers know they are facing inflationary pressures next year and they will be looking at ways they mitigate them.”

While retailers may be pleased with the slight windfall reduced rates will provide, it is not likely to encourage them to borrow more.

How will the wider economy be affected by lower rates?

The decision by the Bank to reduce interest rates is intended to help position the UK to weather storms following the Brexit poll, but the rate cut can only go so far. 

Black says that the “miniscule” cut is only “background noise” when set against longterm economic factors.

“It is for the new Government to pick up the baton and provide the more substantive support the UK economy needs”

Yael Selfin, KPMG

KPMG head of macroeconomics Yael Selfin emphasises that the Government, not the Bank, has the most significant role to play to safeguard the UK against potential recession.

“While the measures announced today may provide the economy with short-term pain relief, it is for the new Government to pick up the baton and provide the more substantive support the UK economy needs,” she says.

“This includes clarity on the direction and timing of future trade negotiations, on its short-term fiscal plans, as well as measures to improve the UK’s poor productivity performance.”

The general consensus is that from both a consumer and business perspective, reducing interest rates is unlikely in itself to have a significant impact on the UK economy and that more work will be needed to stimulate economic growth.