Negative interest rates are the last resort of the central banker and should only be used when absolutely necessary. At least that’s the thought inside the forbidden walls of the Bank’s offices on Threadneedle Street. Only a few weeks ago, Governor Andrew Bailey said that the Bank had never lowered interest rates below zero and was not going to start now.
With the bank rate set at 0.1%, it seemed strange to distinguish between a moderately positive interest rate and a moderately negative rate. But in the world of central banking, such a posture seems to be alive and well. Only the economies considered to be weak and weak become negative. Not the UK.
Of course, Bailey’s argument was more substantial than that. Like his predecessors, he argued that negative rates would put enormous pressure on the big banks, which would see their profit margins on loans reduced. Tighter margins would lead them to accept households and businesses with only the safest credit history, which means fewer loans would be made. Rather than being expansionary, negative rates would lead to a contraction in borrowing – the opposite of what the central bank wanted to achieve.
Last week he changed his tune and argued that it would be “stupid” to rule out such a decision. For many economists, Bailey recognized the magnitude of the current slowdown. And, theoretically, there are ways to protect main street lenders from damage.
Negative rates allow the borrower to repay less at the end of the term than the one originally borrowed. Borrowing is becoming very attractive, and nervous households who may not have taken out a loan to buy a car or a new kitchen can go ahead with such cheap credit. If a street lender can borrow at an even lower negative rate from the central bank, it should be possible to maintain profit margins and remain profitable.
The problem lies in savers who are offered a negative interest on their savings. What happens if they refuse to accept this new reality? They will withdraw their deposits from the banks and find another house for them.
Gold is the usual refuge from negative interest rates, but middle-income families are unlikely to start buying commodity bars or even gold derivatives that allow punters to buy and sell easier. Cryptocurrencies on the other hand – long regarded as a form of esoteric and volatile money – could take off even more than they have already done with traditional savers.
And, deprived of deposits, the large lenders will no longer have the reserves they need to lend, which will run counter to the object of the exercise.
In Japan, the central bank has told the big banks not to worry about deposits and other usual guarantees; he said it would serve as a safety net for the entire financial system. The European Central Bank tried to imitate this position and was only restrained against such a sincere approach by the reluctance of Germany, Austria and the Netherlands, who fear to subscribe to the fragile financial systems of their neighbors in southern Europe.
Bailey’s gloomier outlook for the UK – which expects a shallower recession but several years of business bankruptcies, higher unemployment and weaker investment – could see the UK following the Danes , who approved street lender Jyske Bank’s plan to offer negative rate mortgages.
A poll by city economists has revealed that the majority believe that the unintended consequences of negative rates in an economy the size of Britain will deter the central bank from leveraging this particular lever.
Hopefully the final assessment will remove any notion of national pride and focus on the real consequences. Britain is going to need all the support it can get from its central bank in the next few years.
The return of air travel will be closely monitored
Face masks required at all times, assessments in the interview booths if you show symptoms of Covid-19 and no farewells inside the terminal. Welcome to the bleak future of air travel. These are the guidelines issued by the EU aviation safety body last week for travel at airports.
The 28-page document is full of instructions that would have seemed scandalous in January: to stand 1.5 meters from other passengers during check-in, boarding and passport control; no catering service on board; immediate isolation of passengers who develop fever or cough in flight. But several months after the start of the worst pandemic in a century, the majority of the document appears to be proportionate.
The guidelines of the European Union Aviation Safety Agency are a warning to other sectors and to the consumers who interact with them: this is the new standard. Companies will not only have to adapt to the demands of the fight against a highly infectious disease, but so will the people who work there and buy goods there, whether to go to the gymnasium (limited class attendance, access restricted to machines), the pub (under the watchful eye of marshalls with social distance, if it is a Wetherspoons) or buy a dress in a store (without trying it).
The danger to the global economy is that consumers balk at the changes and reject the gym membership, drink at home and buy online. If potential vacationers, weekend tourists and business travelers refuse to travel by air, the financial crisis in the aviation industry will worsen and a change in transportation and vacation industries may become permanent .
Aviation will therefore be a test of consumer appetite for disturbances and discomfort that will send a signal to other areas closed by the virus. When Ryanair and easyJet resume flights next month, companies should watch closely.
Whitbread borrows to seize opportunity
In another big week for corporate fundraising, Whitbread’s £ 1 billion field stood out. First, it was a traditional rights offering, with all investors being able to subscribe equally. Very admirable too: most deals during the crisis left small retail shareholders behind the scenes in the rush to raise funds quickly.
The second difference is related to the first. Whitbread, owner of the Premier Inn hotel chain and Beefeater, could afford a quiet schedule as he doesn’t need £ 1 billion urgently.
The company, like most of the hospitality industry, loses cash during the foreclosure, so any strengthening of the balance sheet is helpful. But Whitbread could have chosen to raise less from shareholders and increase borrowing. Instead, he went for £ 1 billion for an “offensive” expansion.
CEO Alison Brittain’s bullish argument that many competitors will be “weakened by the pandemic”, creating opportunities for Whitbread, seems correct.
The decline of independent hoteliers was a long-term trend anyway. Meanwhile, its main rival in the United Kingdom, Travelodge, is held by private capital, and therefore weighed down by the usual indebted financial structure. In the fight for new development sites, Whitbread could take advantage of a double advantage in the new world: lower commercial real estate prices and fewer bidders.
Many of the same factors will apply in Germany, which was already Whitbread’s great hope for the next decade. The goal of becoming the largest fiscal operator in this country may have come closer.
The example of Whitbread indicates a trend we can observe in other sectors: from solid companies that are taking market share to under-equipped competitors. In retail, Boohoo has armed itself with £ 200 million to add distressed retail brands to a collection that already includes Coast and Karen Millen.
We may be looking at a world of two speeds: an abundance of cash for the powerful operators and starvation rations for the weak.