When the Bank of England governor says he is not ruling out a cut in the cost of borrowing to below zero, you know there is trouble ahead.
Negative interest rates are the last resort of the central banker and not to be used unless absolutely necessary. At least that is the thinking inside the forbidding walls of the Bank’s offices on Threadneedle Street. Only a couple of weeks ago, governor Andrew Bailey said, in effect, that the Bank had never lowered interest rates to below zero and wasn’t going to start now.
With the Bank rate standing at 0.1%, it seemed odd to make a distinction between a moderately positive rate of interest and a moderately negative one. But in the world of central banking, such posturing appears alive and well. Only those economies considered weak and feeble go negative. Not the UK.
Of course, there was more substance to Bailey’s argument than that. Like his predecessors, he argued that negative rates would put a huge strain on high street banks, which would see their profit margins on lending squeezed. Tighter margins would lead them to accept households and businesses with only the safest credit histories, meaning fewer loans would be granted. Rather than being expansionary, negative rates would lead to a contraction in borrowing – the opposite of what the central bank wanted to achieve.
The problem lies with savers who are offered negative interest on their savings. What if they refuse to accept this new reality?
Last week he changed his tune and argued it would be “foolish” to rule out such a move. For many economists, Bailey was recognising the magnitude of the current downturn. And, theoretically, there are ways to keep high street lenders safe from harm.
Negative rates allow the borrower to pay back less at the end of the term than originally borrowed. Borrowing becomes very attractive, and nervous households that might not have taken a loan to buy a car or new kitchen might go ahead with credit this cheap. If a high street lender can borrow at an even lower negative rate from the central bank, there should be scope to maintain profit margins and stay profitable.
The problem lies with savers who are offered negative interest on their savings. What happens if they refuse to accept this new reality? They will take their deposits out of the banks and find another home for them.
Gold is the usual safe haven from negative interest rates, but middle-income families are unlikely to start buying bars of the stuff or even derivatives of gold that allow punters to buy and sell more easily. Cryptocurrencies on the other hand – long seen as an esoteric and volatile form of money – could take off even more than they have already with mainstream savers.
And, deprived of deposits, the high street lenders will then lack the reserves they need to lend, defeating the object of the exercise.
In Japan, the central bank has told high street banks not to worry about deposits and other usual safeguards; it has said it will act as the backstop for the entire financial system. The European Central Bank has tried to mimic this stance and been held back from such a wholehearted approach only by the reluctance of Germany, Austria and the Netherlands, which fear underwriting the shaky financial systems of their southern European neighbours.
Bailey’s gloomier outlook for the UK – one that expects a shallower recession but several years of business bankruptcies, higher unemployment and lower investment – could see the UK follow the Danes, who have sanctioned the high street lender Jyske Bank’s plan to offer negative-rate mortgages.
A poll of City economists found that the majority believe the unintended consequences of negative rates in an economy the size of Britain’s will deter the central bank from pulling that particular lever.
Let’s hope the final assessment sets aside any notion of national pride and focuses on the real-world consequences. Britain is going to need all the support it can get from its central bank in the next few years.
Air travel’s return will be closely watched
Mandatory face masks at all times, assessments in interview booths if you show Covid-19 symptoms and no goodbyes inside the terminal. Welcome to the unglamorous future of air travel. These were the guidelines issued by the EU’s air safety body last week for travel through airports.
The 28-page document is full of instructions that would have sounded outrageous in January: stand 1.5 metres from fellow passengers at check-in, boarding and passport control; no food and drink service on board; immediate midair isolation of passengers who develop a fever or cough on a flight. But several months into the worst pandemic in a century, the majority of the document seems proportionate.
The guidelines from the European Union Aviation Safety Agency are a warning to other industries and to consumers who interact with them: this is the new normal. Not only will businesses have to adapt to the requirements of beating a highly infectious disease, but so will people who work in them and buy goods from them, whether it is going to the gym (limited class attendance, restricted access to machines), attending the pub (under the watchful eye of social distancing marshalls, if it’s a Wetherspoons) or buying a dress in a shop (without trying it on).
The danger for the global economy is that consumers balk at the changes and bin the gym membership, drink at home and shop online. If prospective holidaymakers, weekend tourists and business travellers decline to travel by air, the aviation industry’s financial crisis will worsen and a shift in transport patterns and the holiday industry could become permanent.
So aviation will be a test of consumer appetite for disruption and discomfort that will send a signal to other sectors shut down by the virus. When Ryanair and easyJet resume flights next month, businesses should watch closely.
Whitbread borrows to seize an opportunity
In another big week for corporate fundraisings, Whitbread’s £1bn pitch to shareholders stood out. First, it was a traditional rights issue, with all investors able to subscribe equally. Very admirable too: most offers during the crisis have left small retail shareholders in the wings in the scramble to raise cash quickly.
The second difference is related to the first. Whitbread, owner of the Premier Inn hotel chain and the Beefeater restaurant business, could afford a leisurely timetable because it doesn’t need £1bn urgently.
The company, like most in the hospitality industry, is leaking cash during lockdown, so any reinforcement of the balance sheet helps. But Whitbread could have chosen to raise less from shareholders and increase borrowings. Instead, it went for £1bn with an eye on “offensive” expansion.
Chief executive Alison Brittain’s bullish argument that many rivals will be “weakened by the pandemic”, creating opportunities for Whitbread, sounds correct.
The decline of independent hotel operators was a long-term trend anyway. Meanwhile, its main UK rival, Travelodge, is owned by private equity, and thus weighed down by the usual debt-heavy financial structure. In the fight for new development sites, Whitbread could enjoy a double benefit in the new world – lower commercial property prices and fewer bidders.
Many of the same factors will apply in Germany, which was already Whitbread’s big hope for the next decade. The goal of becoming the biggest budget operator in that country may have come closer.
The Whitbread example points to a trend we may see in other sectors: strong companies taking chunks of market share from underequipped rivals. In retail, Boohoo has armed itself with £200m to add ailing retail brands to a collection that already includes Coast and Karen Millen.
We may be looking at a two-speed world: an abundance of cash for strong operators and starvation rations for the weak.