Bank of England cuts base rate by 1.5%. But who will it help?

6 11 2008

The Bank of England (BoE) cut the base rate of borrowing money by a staggering 1.5% to 3% in a bid to stimulate lending and as a result stimulate spending. Well, we’ll have to wait and see if that happens. The people that will benefit from this cut are those who have tracker mortgages since this will mean a possible cut in their interest rates and their repayments.

For some, the decrease in the repayments might mean the difference between being able to meet the repayments and having their homes repossessed.

The market had definitely expected a cut in the interest rate, but of about 0.5%, not 1.5%. So, who will benefit from the cut? Not many, especially after how the banks literally scrambled to withdraw most of their tracker mortgage deals. A tracker mortgage is one with a variable rate of interest, which is above the base rate of the Bank of England by a set percentage either for the whole period of the mortgage or a period of time. The benefit of this is that when the rate goes down, so does the interest rate, and vice-versa when the rate goes up. However, some tracker deals will not track the base rate after it falls to a certain level or a minimum level, which is known as a “collar”. Halifax, for example, has a “collar” of 3%, which means that a further cut will not be beneficial to its customers.

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This means that first time buyers who were planning to get on the property ladder will have to look elsewhere. Its already beginning to look like the cut in the base rate has failed to do one of the main things it was supposed to do- enable first time buyers to buy properties. If first time buyers are unable to buy properties, this will certainly come as a blow for the construction industry since it means that their properties will remain empty and they will have to impetus or money to build new properties.

So, why have the banks been so quick in withdrawing their tracker mortgages? To protect their other more profitable mortgage deals, of course. Banks charge interest on their mortgages based not on the BoE’s base rate, but on the LIBOR (London Inter Bank Offered Rate). That’s the rate at which banks lend and borrow from one another. While the base rate has been steadily coming down, the LIBOR has proved to be more sticky, hardly budging at all. According to the data from www.thisismoney.co.uk, the LIBOR for the past four weeks has been between 6.28% and 5.68%. Much above the Bank of England’s base rate.

This means that tracker mortgages have a smaller profit margin than the other deals due to the vast difference in the interest rates. Clearly, deals whose rate are based on the LIBOR are much more profitable for the banks and it should then come as no surprise that they are withdrawing the tracker mortgages.

Another group of people who are likely to lose out are those who depend on the income they get from the interest they get on their savings.

Many people were praying, and certainly many more were hoping for a cut in the interest rate to provide them with some respite in these difficult times. While the cut might be a boon for them, for others, not so much.

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Keynes way of kick starting the economy

22 10 2008


Argos Logo 120x60
Home Retail Group, the company that owns the DIY store Homebase and retailer Argos, reported a loss of £450 million in its half-year operating profit. The reason for this loss is attributed not only to consumers restricting their spending, but also the weakening of the Pound which means that it costs more to import products from other countries, add to that the increase in the cost of raw materials, production and transportation. Products that are seen as a luxury have seen their sales and consecutively their profits drop as consumers switch to cheaper value-for-money products. Budget stores, as a result, have seen their sales and profits increase rapidly, in cases like Poundland, even double.

However, a drop in sales at Argos, which is not exactly an upmarket store, should create a little more than just a flutter amongst businesses operating in similar sectors. This is because it suggests that not only have consumers changed their shopping habits and switched to cheaper stores, they have stopped spending altogether on items they deem unnecessary. There are concerns about unemployment as many are worried that they would lose their jobs. The utility bills and mortgage repayments are rising. All this creates an atmosphere of uncertainity and leaves people preferring to save any surplus rather than spend it as they did before.

John Keynes, Image from Business Week

John Keynes, Image from Business Week

According to John Maynard Keynes, a well-known British economist, who lived during the Great Depression of the 1930’s, the only way to give the economy a kick-start, is to spend and spend and spend. This is because a recession is caused by a fall in demand, not by the fall in supply. Demand has fell quite a lot recently because the credit that backed it no longer exists. Although Governments around the world have injected banks with capital, banks in turn have effectively turned off the tap of credit. Keynes believed that in the event of consumer spending decreasing, the Government should maintain or even increase its spending rather than cutting back. The people employed in the sectors where the Government spends its money would in turn spend their wages benefiting the local businesses who in turn spend and make investments and that gets the whole economy moving again. That way, a downward spiral of recession could be turned into an upward spiral of growth.

Alistair Darling, the Chancellor of the Exchequer, is adopting Keynes’s ideas. He said that the Government would increase its spending on large scale projects. In the long term, it means increasing the national debt as the Government has to borrow money to keep up its spending. So be it. Keynes said that Governments should think of the short term, because, as he put it, “in the long run we are all dead”.





Sales at Poundland and Thorntons thrive

8 10 2008

Poundland, the single price retailer where everything costs £1, announced that its operating profit for the financial year ending March 2008 had risen by a staggering 122%. Its profits rose from £3.6 million to £8 million. This shows that consumers are abandoning traditional retailers and heading for discount stores to save money. However, the interesting thing is that Poundland claim that they have seen a 20% rise in shoppers belonging to the AB social class. AB social class consists of the upper middle class and the middle class and typical occupations include doctors, lecturers, accountants, company directors, etc. This is interesting because those belonging to this class are generally associated with shopping at stores such as M&S, John Lewis, etc. and would rarely be seen, or want to be seen, at a discount store. It seems nobody is immune to the credit crunch, not even the rich. The Times recently reported that Lakshmi Mittal, Britain’s richest man, recently saw the weight of his fortune become a little less heavier as he lost £16 billion due to the drop in the share prices.

Thorntons, the well known chocolate maker, announced that its sales for the first quarter had risen by 6.4%. In addition to its own stores, Thorntorns also has numerous franchisees and also sells to supermarkets. Sales in its own stores grew by 4.9%, while sales at franchise stores and retailers grew by 2.4% and 11% respectively. Although consumers are cutting their spending and avoiding expensive brands and switching to discount stores, they still like to treat themselves occasionally. Thorntons has a well known brand name and a reputation for quality. It has numerous products for under £5 many starting at around £1.15. Add this up and Thorntons has a product that is able to keep up its sales even when other products which are deemed a luxury suffer falling sales.
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Tesco’s first half profit up 11%.

30 09 2008

Supermarket giant Tesco today announced a 11% rise in its half-year pre-tax profits which rose to £1.44 billion from £1.29 billion last year with sales rising 13% to £25.6 billion. Like-for-like sales grew by about 7% which seems very good especially since consumers are cutting back on their spending and discount retailers like Aldi, Lidl, Netto, Iceland, Wilkinsons, etc. are attracting customers from large supermarkets.

It was reported earlier this month that Tesco’s market share had decreased by 0.2% to 31.5%. However, it still has a much greater market share when compared to stores such as Aldi which has 2.9% market share which allows Tesco to benefit from economies of scale. This means it can buy its stock in relatively large numbers at lower cost which would normally allow it to increase its profit margin, but in the current financial situation, it allows Tesco to reduce its prices thereby attracting shoppers looking to reduce their grocery bills.

Tesco introduced a new discount range of about 400 products aptly named “Discount Range” with the aim to compete with discount stores and offer customers value for money. Tesco’s chief executive Sir Terry Laehy claimed that sales of its discount range was rising faster than that of Aldi or Lidl.





Morrison’s Profits boosted by Bargain Hunters

12 09 2008

Retailer Morrisons reported that its profits in the first half of the year rose by 19% to £295 million. Shoppers, who are faced with rising utility bills and higher mortgage repayments, are seeing a reduction in their spending power and are hence switching from more expensive products such as premium branded and organic products to more basic value for money products to reduce their shopping bills. Morrisons, who reduced prices on several everyday items to 50p, believe they have attracted about half a million new customers from their rivals by offering them bargains.


Interestingly, the Times reported that sales of Tupperware lunchboxes, sandwich bags and aluminium foil rose by 40%, 34% and 27% respectively at retailer Sainsburys, but the Thermos flask was clearly the winner seeing its sales double as compared to last year. This shows a clear shift and increase in the number of people who prefer to prepare their own lunch at home rather than spending, what seems like a fortune in these circumstances, on food and drink outside. It seems that shoppers are beginning to scrutinise whats in their shopping basket and making sure they only buy what is needed and that its value for money.

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Customer Service- Do the Businesses Really Practice it?

12 09 2008

“Your call is important to us but all our advisers are busy at the moment. Please call later on..”
How many times have you experienced this? Many times, I am sure. Does this mean that there should always be a person ready (24×7) waiting for your call?

No, what I mean is that the businesses do not take customer services seriously. There are businesses that are notorious ……….. Read More

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