A rate cut is no comfort if viewed from the clifftop
By Andrew Hill
Financial Times Published: December 6 2007 19:49 | Last updated: December 6 2007 19:49
Something nasty happened in November. Some shoppers just stopped shopping. As the finance director of Moss Bros put it on Wednesday, sales ³literally fell off a cliff². Yesterday, Alexon, best-known for its women¹s wear produced under the Dash or Eastex labels, said it too had experienced the Beachy Head effect in the past five weeks.
Retailers who have seen their sales tumble are hardly likely to quibble about the steepness or location of their fall, but many will agree with Alexon that a quarter-point cut in interest rates is unlikely to arrest their descent before Christmas.
There¹s a simple reason for that: the number of homeowners emerging, shocked, from generous fixed-rate mortgages is too great, as the Council of Mortgage Lenders confirms.
In September 2005, nearly three quarters of new mortgages were completed at a fixed rate the highest proportion for years and the rate averaged 4.8 per cent. Advance to September 2007, when the most popular two-year fixed-rates expired, and the average fix had soared to 6.4 per cent. Add a couple of basis points for those too lazy to find an escape from standard variable rates. Inflate rates by a factor to take into account the chilling effect of the Northern Rock crisis on lenders¹ generosity in the following weeks. Suddenly, it is easy to see why some shoppers decided to defer the purchase of a new notch-lapel dinner jacket (£100, Moss Bros) or a long black suedette coat (£79.99, Dash). They may not be attracted back to the fitting room by the prospect of a mere £30 off the monthly payments on their £150,000 interest-only mortgage.
The CML estimates that 1.4m borrowers will be released from their fixed-rate mortgages over the next year. That is not a particularly large number by historical standards, but they fixed when the cycle was low and they are likely to get a shock only slightly smaller than that suffered by the autumn cohort when they seek out a new deal.
The Bank of England¹s decision is both necessary and welcome, but it is merely a cushion. For those teetering on the cliff-edge, a cushion, however strategically placed, is not much comfort.
Sky has a vice-like grip
If you thought the fight over BSkyB¹s stake in ITV and the spat between the satellite television company and Virgin Media over Sky One were bloody, prepare for a bigger battle. That is one message of submissions to Ofcom from Sky¹s rivals and Sky itself.
Some elements of this contest are delicious to observe. Take the ³vicious circle² that forms the centrepiece of Virgin Media, BT, Setanta and Top Up TV¹s allegation of market failure. BSkyB calls it a ³fictitious circle², but surely there must be some at the media group who consider it a wholly virtuous example of market success. Sky owns attractive programming, which it uses to entice subscribers and then mount big bids for even more attractive content. Not since Heidi Fleiss set up shop has ³vice² furnished such a good business model.
It is also intriguing to see BT, which was restructured by regulatory fiat so that Sky (among others) could poach its telecoms customers, using the same principles to badger Ofcom into opening up the pay-TV market.
The complaint does put Ofcom on the spot. But it would be premature to assume that it will lead to radical intervention, which is one reason why BSkyB investors seem unruffled.
Ofcom is nothing if not a modern regulator, founded with an eye to convergence rather than segregation. While Virgin Media and BT pursue customer marketing campaigns based on tearing down the walls between different media and distribution methods from Fusion to ³four-play² when it comes to challenging Sky on the regulatory front, they really need the assistance of a watchdog of a more traditional breed.
Rock bites City
³Business leaders call for less red tape² should be a ³dog bites man² story. The surprise in the latest CBI survey of business leaders is that increasing regulation is not considered the biggest threat to London¹s competitiveness. (The bosses grant that accolade to the capital¹s crumbling infrastructure.) A further surprise is that the serious regulatory fumble over Northern Rock doesn¹t merit a mention. That must be due to the timing of the poll, which straddled the September 14 announcement of government support for the bank. Since then, the anecdotal evidence has grown that the débacle poses as big a threat to London¹s reputation as any of those mentioned in the CBI survey. Grandees from Lord Jones, former head of the CBI and now a trade minister, to Sir David Walker have lamented the Rock effect.The disaster poses a double-threat to London. One is the direct knock to its reputation. There, the damage is already done. But the other, more insidious, menace is that, in trying to prevent a repeat, government and regulators may wrap an extra layer of red tape around UK-based business, just as other financial centres are mounting their counter-attack. And to think that, six months ago, complacency was probably the biggest threat to the UK capital¹s prospects...