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Guarded view on interest rate cut

Mixed, cautious, guarded, scepticism and lukewarm are all words being used in response to the Bank of England's record-breaking announcement on interest rates.

Down 0.5% and now sitting at 1.5%, the rate becomes the lowest set by the bank in its 315-year history.

In Scotland, the Federation of Small Businesses duly welcomed the move but warned that the "real worry" was not just the cost of finance but access to it.

Its policy convenor Andy Willox said: "Despite previous cuts, around a third of our members are still complaining about poor access to affordable and flexible finance."

Those words are being echoed by CBI Scotland's director Iain McMillan, who said the "modest cut" could not on its own "restore credit flows".

I have been in Perth to see the reaction to the rate cut.

Even in the construction industry and the becalmed property market (the Perthshire solicitors' property centre is reporting transactions down 78% on last year and average prices down 15.5%), there is scepticism.

Here, they raised their concerns about the knock-on effect on savers, who already faced interest rates nearing zero. And there was a warning that repeated deep rate cuts simply signal the depth of the crisis, whereas prospective home buyers are looking for more stability and signs of confidence.

Graeme Brown, the director of Shelter Scotland, the housing and homelessness charity, said he had concerns that lenders would not pass on the reduction to "hard-pressed borrowers".

He added: "The Bank of England recognises the need to relieve pressure on homeowners and the economy. Now it's up to lenders to do the same, while also freeing up mortgage lending."

There is some recognition that weakening sterling should be good for the locally important tourism market, attracting foreigners and keeping Brits close to home for their holidays.

But so far, the pound has risen on the news, reflecting relief in the currency markets that the cut wasn't deeper. It now seems to be driven by which way traders turn to find which currency zone is in the least trouble, and both the US and Eurozone have had some grim indications lately.

The rate cut is big news, but it seems attention should be more focussed on fiscal policy and its consequences.

One issue to watch is the potential for trouble governments will face in trying to raise an estimated three trillion US dollars worth of bonds this year.

The relatively prudent Germans kicked off the bond market year on Wednesday, and the signs were far from reassuring.

Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/1/hi/scotland/7818471.stm

Published: 2009/01/08 16:06:34 GMT

Print   2009-01-09