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Bank Lending

UK businesses are losing more than £7bn a year due to a combination of low bank interest rates and above target inflation

By CreditMan Tuesday, August 20, 2013

Interest rates on business deposits are now at a record low, at just 0.59%. This combined with relatively high inflation (RPI 3.1% in July – compared to a target rate of 2%) mean that business savings are rapidly declining in value.

The amount of cash held in business accounts that offer no interest at all has more than doubled since 2009. According to the Bank of England a record £52.9 billion is currently deposited in accounts yielding 0% interest.

Since the credit crunch lending to small businesses has become a priority for the Bank of England. Initiatives such as the Quantitative Easing programme and the Funding for Lending scheme – which are both designed to boost lending – have contributed to the slashing of interest rates.

Many businesses are now having to hold large cash balances because they feel when they need them, they can’t rely on banks to provide overdraft facilities at reasonable rates.

Mark Giddens, Head of Private Client Services, explains: “As the Bank of England continues to focus its attention on reviving lending to small businesses, those with no current need to borrow are being punished for being prudent and keeping cash reserves.”

“Before the Funding for Lending scheme was introduced, interest rates were competitive in order to attract savers. However, under the Funding for Lending scheme banks are now getting cheap funding from the Bank of England, which means they no longer need to offer generous interest rates to businesses.”

“With the recent announcement that interest rates will remain low until unemployment falls below 7% - which economists are predicting won’t be until 2016 and the confirmation that Funding for Lending scheme will be extended until 2015 – businesses will continue to see the value of their savings eroded for some time to come.”

Mark says: “Businesses just aren’t getting a good deal from their banks. In order to ensure they are making the best out of the bad situation, businesses need to be pro-active and shop around for accounts and other products that offer the best interest rate possible.”

“With some recent signs of the economy picking up we might also see more businesses deciding that now is the time to start cutting cash reserves and making new investments.”

Source - UHY Hacker Young - Publications that covered this story include Financial Times and Independent, 19 August.