Whilst I personally welcome the fact that this is a unified global response – and brings certainty into the banks’ planning equations – it also sets in stone the new liquidity reality. It’s fair to say that whilst the UK banks are already adequately capitalised, many overseas ones are not. We are already seeing Deutsche bank announcing plans to raise sufficient funds to increase its reserve capital by 50%/£10bn. European banks alone are estimated to face raising £110bn-£150bn.

“Reserve Capital” is just a ratio, though, and another way for banks to increase it is to shrink their balance sheets. That can mean divestments but it also – more easily – means reducing aggregate lending. So whilst UK businesses looking for bank facilities can perhaps breathe a collective sigh of relief that our own institutions are currently well capitalised, we should reflect that those serving our key European target export market are not.

The impact on pricing should not be forgotten either as the ratio of 7% is three times the pre-crisis standard. That means that the increase in average interest costs over and above Base Rate that I have previously blogged about (  http://www.expense-reduction.co.uk/2010/01/uk-banks-increase-business-cost-of-borrowing/ ) is here to stay. Finance Directors need to reflect that whilst interest costs have not fully reduced in line with the tumble to 0.5% base rates, it is certain that in the future they will fully reflect any return to historically more normal levels. In other words the margin increase is not temporary and reflects a new structural reality.

In essence today’s news is good in that it brings global uniformity and certainty to lenders. Moreover the ratio of 7% is probably at the lower end of their collective fears. But to use a medical analogy it is a splint or crutch that will aid, but not in itself lead to, recovery.

(The new ratios do need formal approval by the G20 by the way. And it is true that both the UK and US wanted stronger ratios of 10%, and Germany championed lower levels. So it will be interesting to see if G2o endorsement is a formality or not. My suspicion is that it will be, with perhaps some political posturing).

It is a sign that higher rates are now most definitely on the horizon worldwide though. And it took markets by surprise!

What I found quite telling was its prediction of inflation if market expectations of interest rates hold true. That showed a much weaker outlook for prices, with inflation still below target even in 2013. I reckon this calls into question recent consensus economist opinion of dramatic rate rises from Q4 and now points to a more prolonged period of low interest rates.

In terms of the Bank’s quarterly forecasts for economic recovery - which I am sure politicians are avidly watching out for – the Bank’s Governor, Mervyn King, said that the path for growth was little changed from the last report in November.  On the one hand, the recovery was likely to be weaker than previously thought but on the other the downside risks to growth in the future were smaller.

There were no particular clues about Quantitative Easing being considered further, other than a repetition of what was said after base rates were reviewed by the MPC recently; in other words its a “pause” not necessarily an end to money creation.

The survey was conducted by Reuters on 7th January this year and what is striking is that whilst there is wide disparity around “when” and by “how much” rates will rise, there  is unanimous consensus that significant increases are just around the corner.

I have highlighted margin increases in previous blogs (the average margin increased by 0.4% in just the three months of August to November ‘09 according to the Bank of England) and common-sense suggests that businesses should ensure they budget realistically for the cost of finance going forward. A business facing average interest costs for working capital at circa 2.5% could conceivably face 5% within 15 months – a doubling!

Certainly in finance related projects that we have concluded in Expenses Reduction Analysts over the downturn, the emphasis has been on reducing processing costs whilst containing borrowing costs. Mainly this is because bank managers have become painfully aware of their own true “cost of funds” but the better ones – the ones who take a long-term view of relationships – recognise that concessions can be made elsewhere.

And in announcing the downgrade today S&P warn that it could get worse unless UK government gets to grips with the structural budget deficit.

The immediate implication of today’s decision is that it will be dearer for our banks to raise the ordinary liquidity that finances so much of what they lend. I reported in earlier blogs that average margins of new and re-financed bank lending to the corporate sector had increased to 2.4% over base rate from 2% in just three months (which is a staggering 16% increase in the bank interest business overhead at a base rate of 0.5%). The battered balance sheets of our banks mean they will not absorb further increases in the costs of their raw materials…..they will pass them on through further increased margins.

This trend affects smaller and medium-sized enterprises particularly strongly as buoyant capital markets can still meet the needs of larger business.

Commenting, Stephen Whitlam of Expense Reduction Analysts Banking Team said “Local bank managers are acutely aware of the cost of funds, and the need for their own business to make a return and repair balance sheets; so this trend will continue.”

I am pleased to report though that Expense Reduction Analysts Banking team  remain able to identify and secure valuable bank service charge savings for clients. Key success areas are Merchant Card Fees, Cash Processing and Secure Cash Handling. Lets not fool ourselves – the days of low lending margins are behind us for the foreseeable future, added to which, base rate will also rise as economic recovery takes hold. But effective bank relationship managers will have also embedded other services into our clients ……other services that are deliberately difficult to price reference from a competitive perspective, unless they have access to market information such as that we can provide.

The Office for National Statistics announced today that Consumer Price Index (CPI) inflation rose 1% last month, taking the annual rate up to 2.9% from 1.9% in November.

That was the biggest monthly rise in the annual index since records began and significantly worse than the City’s expectations for an increase to 2.6%.

Retail Price Index (RPI) inflation also rose to 2.4%, its highest level since November 2008.

This was a rise from 0.3% in November, and also constitutes the biggest monthly rise in the annual rate since 1979.

We all know borrowing rates are going up….but now maybe sooner rather than later!!! The analyst commentaries I have seen today point out that a large reason for the increase may be that 12 months earlier – when the recession first hit home – retail prices (including petrol) fell back generally. And those same analysts point out that whilst the return of 17.5% VAT on January 1st will feed through to further inflation increases for that month as well, there is still deflationary pressure in the economy through structural over supply. We shall see; maybe those “one-off” reasons and the nearness of an election may see interest rates stable for a while longer ….but surely the writing is on the wall?

The governor of the Bank of England is almost certainly going to have to write an open letter to the Chancellor if next month’s inflatiion figures are as high as anticipated; he will perhaps have a wider audience than is normal!

One key is going to be how effective employers – including crucially the public sector - are at fighting wage increase requests backed by inflation.

Controlling inflation will be the reason and Sentance says it would be wrong for markets to assume base rate will stay at the unprecedented low of 0.5% throughout 2010. His exact words? :-  “It would not be wise to put yourself in that camp. A lot can happen in a year. In 2008, we moved from a position where the economy was growing quite healthily at the beginning of the year to diving into deep recession by the end of the year………last year we moved from the position where a deep recession was getting deeper to a position where the economy is now recovering, albeit in an early phase. It would be wise not to be too definitive about what to expect this year.”

It’s fair to say that nothing in the interview suggests a central fear that inflation will run out of control; but it does show that the fight against it remains a key policy aim.

Other pertinent topics covered were Quantitative Easing and the possibility of a so called “double-dip” recession. Sentance seems to dismiss the latter risk, while warning that the recovery will be fragile though. On the former he suggests that whilst further stimuli will probably cease, it is unlikely the underlying liquidity boost of £200bn will be swiftly reversed.