12 August 2016 10:15
Interest rate cut won't help, say IoD members
The Institute of Directors has questioned whether the Bank of England's interest rate cut to an all-time low of 0.25% will make any difference to the UK economy.
It says the UK's most pressing problem is not liquidity but confidence; and an IoD survey this week among members shows that although the cut has been welcomed, six in ten think it "will not have a discernible effect on their performance".
The IoD is calling on the Government - rather than the Bank of England - to do the "heavy lifting" to improve business confidence. IoD economist James Sproule said: "In the aftermath of the referendum, the Bank of England's credibility in promising it would do whatever it took to maintain market liquidity was very important. But the problem now is confidence, not liquidity or access to capital. The cost of capital is not the major factor for business at the moment."
He added: "The Bank cannot do the heavy lifting on boosting business confidence, the Government has to play its part. The real test of confidence is going to be the Autumn Statement, which could be usefully brought forward several weeks."
IoD research also shows that a "business confidence gap" is emerging - firms are worried about the economy, but they are generally positive about their own outlook.
Simon Walker, IoD director general, said: "The UK badly needs an injection of confidence to prevent general concerns turning into lots of individual decisions to stop hiring and investing. We need the Government to produce a bumper, feel-good Autumn Statement. Increasing tax breaks for investment and cutting corporation tax would be a very good start, as would delaying the poorly designed Apprenticeship Levy."
The latest IoD survey also shows a change of heart by businesses about the timescale for tackling the fiscal deficit. In May, 80% of directors supported the Government plan to eliminate the deficit by 2020. But by late July, 78% said prime minister Theresa May was right to drop that target.
Meanwhile, the CBI has said the interest rate cut should be a "shot in the arm" for business and consumer confidence. Rain Newton-Smith, CBI chief economist, said: "The Bank's action will help restore confidence in the UK economy and what's now most important to businesses is that the Government develops a clear plan and timetable for EU negotiations."