The power of interest rates

19 August 2010 by
The power of interest rates

Peter Hancock, chief executive of Pride of Britain Hotels, asks what effect the Monetary Policy Committee's decision to keep the base rate at 0.5%, as well as next year's rise in VAT, are going to have on the industry.
It is now a year-and-a-half since rates fell to their present level, though most borrowers are paying well above the base rate and many are unable to obtain loans at all.

Nonetheless, the present situation is good for those with a tracker mortgage and a secure job as they have more disposable income than ever and are probably not tempted to put a lot into savings due to weak returns.

This is excellent news for the luxury hotels sector and may well be the single most important factor behind the more positive results announced recently, against the backdrop of a topsy- turvy economic world where talk of "recovery" and "double-dip recession" can often feature in the same news bulletin.

I'm surprised by the amount of attention focused on the forthcoming VAT rise to 20%, which should add just 2.13% to the cost of applicable goods and services. This is serious stuff if you are buying a swimming pool or a combine harvester, but its effect on the price of a meal or a hotel room is hardly going to deter many customers from such indulgences.

Another 2% or so on interest rates, on the other hand, could wipe out thousands of businesses and would make some of our customers feel considerably poorer, perhaps poor enough to stop going out to restaurants or taking short breaks at all.

Let's remember, too, that continued low rates would not be possible if our new government had avoided the uncomfortable need to restrain the growth in public debt, of which the VAT rise is just part of the solution.

Our customers are not impoverished fools. They adapt their behaviour according to circumstances and have become sophisticated users of online purchasing tools. They expect good value for money - even the millionaires - and are well aware of the choices that are available to them.

For these reasons alone we have to work hard to meet their demands, and hope the Bank of England holds its nerve.

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