Britain's households don't have much to smile about at the moment, so falling interest rates should bring a glimmer of light into the lives of the nation. Two record rate cuts in as many months have brought the Bank of England base rate to 2 per cent, a level not seen since 1951, and many economists expect them to fall further still. Zero per cent interest rates are being talked about in all sincerity, and for those with large mortgage payments that should be a mouth watering prospect.
But UK consumers are apparently still reluctant to celebrate. According to Lloyds TSB's Corporate Markets Consumer Barometer, many are still bracing themselves for interest rate rises next year. Confidence in the economy may be approaching rock bottom, but confidence in the nation's policy makers appears to be even lower.
Assuming that the natural pessimism of the general public is misplaced (just as the irrational exuberance of the boom years was), and rates really are heading to such low levels, what does that mean for UK companies?
For banks, of course, the immediate implications are not good. Banks obtain day to day funding through the Interbank markets at Libor, which remains in excess of the current base rate despite government efforts to encourage banks to lend to one another more cheaply. Because of this, banks will avoid passing cuts on if they can, but government backing may mean they face a three line whip to do so, and that will hit their profits.
Many have already responded by pulling tracker products, which force them to pass on rate cuts, or raising tracker rates to unattractive levels. That's bad for housebuilding, too, because without access to attractive mortgage financing consumers will be reluctant to commit to new purchases - which could mean the housing market in 2009 could be grimmer, even, than this year. Low rates mean banks will also struggle to attract new savers, a further blow to their efforts to recapitalise.
The corollary is that consumers will, in theory, enjoy higher levels of disposable income, and that should be good news for the myriad of pubs and retailers desperate for a trading boost. Unfortunately, a pre-Christmas trading boom looks like it will be short-lived. Data from Nationwide showed that consumer confidence hit a four year low in November, and the danger that shoppers seek cheaper alternatives or simply "go on strike" altogether is a very real one. Some analysts predict a high-street bloodbath in the New Year, arguing that many families will see this as a time to batten down the hatches and get their own finances in shape. And many who rely on savings interest for income will see their spending power reduced.
So are these efforts to stimulate the economy in vain? The answer is, not entirely. Falling interest rates combined with the governments spend-then-tax fiscal policy is severely denting the value of Sterling, and that could prove a boost to companies that already generate a large proportion of their revenues in Europe or the US, the UK's main export partners. It may also stimulate an increase in export trade, but that will take time, and as October's trade defecit of £7.8bn shows, the UK still imports far more than it ships overseas, and these will become more expensive.
