I haven’t seen too many 50-year-old children’s films, so I don’t have a frame of reference, but Poppins seems to deal with some unexpectedly weighty themes, like the British class system and chimneysweepers’ rights.
It’s essential viewing for the Bank of England Monetary Policy Committee (MPC), which is grappling with how to persuade people to spend more of their tuppences on frivolous leisure activities like feeding the birds and less on investing it in a bank so that it blooms.
Savings certainly did bloom when the film was originally released. In 1964, the base rate was a generous 7% and it remained high for 30 years, peaking at a frankly ridiculous 17% in the late 1970s. It’s been a different story more recently. Rates have been held at 0.5% since 2009 and this week the MPC cut them to a new record low of 0.25%.
There is now the genuine prospect of negative interest rates, where banks would charge you for holding your money in your account. It seems inconceivable but has become quite common in Europe as governments try to shock life into flagging economies.
Tour operators will feel the pinch more than most. Their cash cycle, whereby customers pay well in advance 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 holds and there were some operators that only ever made an annual profit from the interest return on their client’s money. Their holidays were almost “loss leaders” in the same way Tesco might discount petrol to get people into their store. Those days are thankfully long gone and travel has adjusted 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 is very welcome news for those with significant loans outstanding, like those purchased through leveraged private equity-backed buyouts in the past 18 months. Sadly the day when banks pay you to borrow from them is unlikely to materialise – typically, loan agreements will have an interest rate floor, meaning they can never go below zero.
The MPC is of course trying to make saving money as unattractive as possible to encourage us to spend more. If it works, the travel sector could well see a much-needed bounce in bookings in time for the 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 cash under their mattresses. Large-scale withdrawals could even trigger a run on banks.
Let’s hope the Bank of England’s spoonful of sugar doesn’t bring the economy down.
Martin Alcock is director of Travel Trade Consultancy
