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What could the interest cut rate mean for retailers?

By Vivian Hendriksz


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Management |ANALYSIS

The Bank of England (BoE) has slashed interest rates to a record low of 0.25 percent, in an attempt to hold off a Brexit recession.

It is first time in seven years that the Bank has announced a reduction, which sees interest rates at their lowest point since the Bank of England was founded in 1694. The decision is part of a larger package which was designed to ward off a recession following the UK’s vote to exit the European Union by easing monetary policy and helping sustain growth and employment.

Interest rate cut: "This move is hardly likely to boost flagging consumer confidence"

So what does this mean for UK retailers? The stimulus package aims to encourage businesses and retailers alike that consumers will spend more and save less as they’ll receive low interest rates. But will this cut lead to the flurry of retail spend fashion brands and retailers alike are hoping for in a time when consumer confidence in the UK is declining?

“With the immediate impact of the interest rate cut being a drop in the value of the pound, this move is hardly likely to boost flagging consumer confidence, which is a major factor in driving spend,” pointed out Nivindya Sharma, Senior Analyst at Verdict Retail. “In addition, consumers will see returns on savings fall yet further. In theory, this is supposed to stimulate spend by making it less desirable to save, but there seems little evidence this has worked up to now.”

In addition, the lower cost of borrowing is unlikely to encourage consumers to take out mortgages, boosting the stagnant housing market and therefore offering a jump in homeware and furniture retail sectors, adds Sharma. “The interest rate cut will provide a bit more money in the hand for tracker mortgage holders, who will see their monthly repayments drop – but with only 1.5 million mortgages being affected by this (according to the ONS), the impact will not be material.”

The interest rate cut suggests that the Bank’s aims at warding off a recession are in the long term - by encouraging borrowing and spending for large scale projects and making it cheaper for businesses to do so - in turn encouraging employment. In theory, this should create a more stable economic environment in the UK and lift retail spend in the long term, according to Sharma.

“[But] sadly, it looks like the interest rate cut is not the magic potion that will solve the challenges of the retail sector and is thus unlikely to provide a significant impact. Indeed the danger is that it could actually create even less confidence in the economic outlook and drive confidence down further.”

Photo: By Katie Chan (Wikimedia Commons), via Wikimedia Commons

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