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August 23, 2013

Businesses 'punished' for holding cash reserves

UK businesses are losing more than £7bn a year because of low bank interest rates and above target inflation, according to accountancy group UHY Hacker Young.

Interest rates on business deposits are now at a record low, at 0.59%. Relatively high inflation means that business savings are rapidly declining in value.

The number of business accounts that offer no interest at all has more than doubled since 2009. According to the Bank of England, a record £52.9 billion is currently deposited in accounts yielding 0% interest.

Ongoing difficulties in raising finance mean that many businesses are now holding large cash balances because they feel they can't rely on banks to provide overdraft facilities at reasonable rates when they need them, according to UHY Hacker Young.

Mark Giddens, head of private client services at UHY Hacker Young, said: "As the Bank of England continues to focus its attention on reviving lending to small businesses, those with no current need to borrow are being punished for being prudent and keeping cash reserves.

"Before the Funding for Lending scheme was introduced, interest rates were competitive in order to attract savers. However, under the Funding for Lending scheme banks are now getting cheap funding from the Bank of England, which means they no longer need to offer generous interest rates to businesses."

He added: "With the recent announcement that interest rates will remain low until unemployment falls below 7% – which economists are predicting won't be until 2016 and the confirmation that Funding for Lending scheme will be extended until 2015 – businesses will continue to see the value of their savings eroded for some time to come." 

Giddens said: "Businesses just aren't getting a good deal from their banks. Businesses need to be proactive and shop around for accounts and other products that offer the best interest rate possible. With some recent signs of the economy picking up we might also see more businesses deciding that now is the time to start cutting cash reserves and making new investments."

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