Warm welcome for cut in interest rate

Oct 9 2008 The Journal

AN unprecedented package of measures designed to salvage the ailing world economy – including a surprise cut in interest rates – received a warm welcome in the North East last night.

The Bank of England cut interest rates by 0.5% to 4.5% yesterday as part of a global response to the meltdown in financial markets – the first co-ordinated action since the 9/11 terrorist attacks.

Central banks across Europe, the US, Canada and China reduced interest rates in an emergency move.

The announcement followed confirmation that UK taxpayers will fund a £50bn part-nationalisation of major banks under a Government rescue plan – with a further £250bn in taxpayer guarantees.

But the extraordinary measures provided little respite for stock markets as fears mounted of a global recession.

Prime Minister Gordon Brown described the plans for the banking sector as “bold and far-reaching” but admitted the measures would offer no quick fix.

Eight UK banks and building societies – including Royal Bank of Scotland, Barclays, Halifax Bank of Scotland, Lloyds TSB and Nationwide – have pledged to increase their capital by £25bn but Government will pump in the funds if called upon.

The Treasury also stands ready to make at least another £25bn available if necessary.

The Bank of England – alongside its interest rate reduction – is also taking emergency action to help ensure that banks have enough cash to run their day-to-day activities.

Mr Brown also moved to reassure that taxpayers would have the potential to “earn a proper return” from their investment. The cut in rates will mean a saving of around £47 a month on a typical £150,000 mortgage if the reduction is passed on in full by lenders.

Business leaders welcomed the move but said more cuts were needed to prevent a prolonged recession.

James Ramsbotham, chief executive of the North East Chamber of Commerce (NECC), described it as “an unprecedented move during an unprecedented period in global financial affairs”.

“NECC strongly welcomes such a bold step and we hope it will inspire the activity needed to restore both confidence and financial liquidity,” he said.

One NorthEast chief executive Alan Clarke said: “We welcome this co-ordinated move which we hope will stimulate the flow of funding to business at this difficult time.”

CBI North East assistant regional director Liz Mayes said yesterday it was an “essential and timely rate cut” while EEF regional manager, Tony Sarginson, said: “Manufacturers will welcome this bold and decisive move to arrest the current crisis and collapse in confidence.”

John Wright, Federation of Small Business regional vice chairman, said: “This should be very helpful to Britain’s small businesses but the welcome cut will only come into play if the banks follow through and reduce their charges to small businesses accordingly.”

Steven Marks, lending executive at Newcastle Building Society, said the rate cut had come “not a moment too soon to help restore market confidence”.

Andrew Priestley, stockbroker with Redmayne Bentley, said: “I’m a stockbroker, but I’m not bothered about the share prices today. What we need is to break the logjam of banks lending to each other.”

It is hoped the Government’s banking package will provide the capital boost needed to get banks lending to each other again.

In return, the Government is demanding that banks cap executive pay and shareholder dividends and commit to supporting lending to homebuyers and small businesses.

The Prime Minister said there would be “strings attached and conditions to be met” to ensure taxpayer interests were protected. The Government is now in talks with banks over the level of individual take-up and terms of the deals.