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What the bank bailout means for you

By rotide
Created 23/04/2008 - 01:00
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News that the Bank of England is to inject £50bn into the financial system by lending banks money in exchange for potentially risky mortgage debts should be welcomed by business owners up and down the country.

Under the proposals, banks and other financial institutions will be able to exchange mortgage debts for secure government bonds, with the intention of freeing up cash so banks can begin lending to each other again.

The government's primary aim is to prevent another Northern Rock fiasco, where a company's business plan is rendered useless by its inability to secure funds for home loans. But by injecting such a large amount of money into the system the hope is also that the Libor inter-bank lending rate will also come down.

This would mean banks are able to reduce the mortgage rates they offer customers, and begin to pass on the interest rate cuts implemented by the Bank of England.

Abbey has already cut its two-year tracking and flexible mortgages by 0.1% while the government reduced the standard variable rate on its Northern Rock offering by the same amount, although both these are substantially less than the recent 0.25% cut in the base rate.

The effect on small businesses owners is two-fold. For those businesses directly reliant on the housing market such as lawyers, estate agents or removal companies, this should provide a boost to the housing market, where confidence has now reached its lowest point in 30 years.

Even for those not directly dependent on the housing sector, cheaper mortgages will mean those taking out new loans or coming off fixed-rate deals should have slightly more money to spend

Even for those not directly dependent on the housing sector, cheaper mortgages will mean those taking out new loans or coming off fixed-rate deals should have slightly more money to spend, hopefully boosting the general economy. Home furnishing stores, carpet retailers and DIY outfits all depend on a buoyant housing market for their own success.

The second effect is that banks may once again be slightly more willing to lend money to each other for other purposes, such as business loans. No bank is likely to be taking too many chances in the next few months so it will remain very difficult for start-ups to receive funding in the current climate.

But those businesses that are on a solid footing and can demonstrate an effective business plan may now find it easier - and slightly cheaper - to gain access to finance.

Yet there are also signs of further storm clouds on the horizon for small business owners. The furore over the abolition of the 10p tax rate - which will see single people earning less than £18,500 lose up to £232 a year - is likely to lead to demands from staff for pay rises at just the time when they need to be keeping costs firmly under control.

And in the rush to repair the damage now the full extent of Gordon Brown's last Budget as Chancellor has become clear, there have been vague promises that the government will somehow make this up to low-earners.

One theory is that this will be through raising the national minimum wage, which is already set to rise to £5.73 an hour from October.


Source URL:
https://www.newbusiness.co.uk/articles/banking-finance/what-bank-bailout-means-you