I have a confession to make. Before July 2016, I had never seen the film Mary Poppins. The good news is, my children are on holiday from school so we’ve now put that right. Eight times.
I can’t honestly say Ive seen too many 50 year old children’s films, so I dont have a frame of reference, but Poppins seems to deal with some unexpectedly weighty themes. The British class system, the struggle for universal suffrage, chimney sweepers rights. Its also essential viewing for the Bank of England Monetary Policy Committee (MPC), who right now are grappling with the central question: How do you persuade people to spend more of their Tuppences on frivolous leisure activities like feeding the birds and less on investing it prudently in a bank so that it blooms?
Savings certainly did bloom back when the film was originally released. In 1964 the Base Rate was a generous 7% and it remained high throughout the next 30 years peaking at a frankly ridiculous 17% in the late 1970s. Its been a different story more recently, though. Rates have been held at 0.5% since the financial crisis in 2009 and there was news this week that the MPC were planning to cut it to a new record low of 0.25%.
There is now the genuine prospect of negative interest rates in the UK, where banks would charge you for holding your money in your account. It seems an inconceivable concept but has become quite common in Europe as governments try to shock some life into their flagging economies.
Tour operators will feel the pinch more than most. Their cash cycle, whereby customers pay well in advance of travel, and suppliers are paid close to departure, mean cash balances are proportionally higher relative to other sectors. A tour operator ’s main asset is usually the client money it is holding and in fact there were some operators who only ever made an annual profit as a result of the interest return on their client’s money. Their holidays were almost “loss leaders” in the same way Tesco’s might discount petrol to get people into their store. Those days are thankfully long gone and the sector has had to adjust to life without interest as an income stream. Nevertheless, negative rates would be an additional cost that the sector could do without.
On the plus side a reduction in borrowing costs will be very welcome news for those with significant loans outstanding, such as those purchased through leveraged Private Equity backed buy outs in the last 18 months. Sadly the day when banks pay you to borrow from them is unlikely to materialise though. Typically, loan agreements will have an interest rate floor meaning they can never go below zero.
The MPC are of course trying to make saving money as unattractive as possible in the hope of encouraging us to spend more. If it works, the travel sector could well see a much needed bounce in bookings just in time for the tail end of the lates market. However there is a big risk that negative interest rates may have the opposite effect. Spending could actually fall if panic ensues and people rush to horde their cash under their mattresses. Large scale withdrawals could even trigger a run on banks.
Lets hope the Bank of England’s spoonful of sugar doesn’t bring the economy down.