DID INSOLVENCY STATS SCARE MPC INTO LARGER THAN EXPECTED BASE RATE CUT?
Under a bit of government pressure, banks are lining up today pledging to pass on big interest rate cuts to customers following the MPC’s historic move yesterday. I wonder whether the MPC had got wind of the latest quarterly insolvency stats showing that companies going bust in England and Wales hit the 4000 mark in July -Sept. That represented a nasty 26% increase on the corresponding quarter last year. No wonder the Bank of England thought the time was right for a slashing of the base rate.
So just how bad is 4000 insolvencies in a quarter?
I find it interesting to see that insolvencies hit the 5000 figure in the last quarter of 1990 after being around the 3500 figure in previous quarters- that 4th quarter of 1990 marked the beginning of the last recession. During 1991, insolvencies then moved up a gear, regularly surpassing 5000 and sometime over 6000 insolvencies per quarter through 1991 and through 1992 before in 1993, they started falling again to the 4000 level. Does this mean that this current downturn will go on for the next two and a bit years then?
Could do. Certainly, credit analysts will be more prudent in assessing risk throughout this period of time.However, due to the fact that inflation is lower and interest rates are lower this time round, I’d like to think we’re better placed to come through this quicker than in the early nineties. One thing’s for sure; with the LIBOR rate dropping today, banks should start to play their part in helping to stave off some impending insolvencies by getting cash to companies that need it.