Hospitality sector welcomes interest rate decision

By Lorraine Heller

- Last updated on GMT

Related tags: Finance

A rise in interest rates could be disasterous for some hospitality businesses
A rise in interest rates could be disasterous for some hospitality businesses
The Bank of England is holding its interest rate at the record low of 0.5 per cent, a decision that allows the UK’s restaurant, pub and hotel sector more time to recover from a hit to consumer spending.

The rate has remained unchanged since March 2009, when it was lowered to 0.5 per cent in order to stimulate economic recovery.

Hospitality analysts and finance advisors say the decision is good news for the sector, but warn that operators need to be ready for the hit to consumer spending when an increase in rates does arrive.

Spend at restaurants and pubs

“The decision by the Bank of England to hold interest rates is good news for the leisure sector,” said Paul Hemming, head of corporate finance at Zolfo Cooper, which provides corporate advice to the sector.

“A move to increase bank rate at this time would further dampen consumer spending – damaging the recovery – at a time when our research through the Leisure Wallet Report shows that consumers are already significantly tightening their belts, especially when it comes to what they spend on leisure activities, such as eating out.”

Zolfo Cooper’s Leisure Wallet Report, which interviews over 3,000 people to gauge consumer spending habits, found that almost half of consumers were cutting back on restaurant and pub expenses.

Results revealed that 41 per cent of diners were spending less on eating out in December 2010 compared to six months earlier, while 42 per cent of drinkers were spending less in pubs and bars.

Uncertainty in the market

Peter Backman, managing director of foodservice analysts Horizons, said today’s decision means consumer spending won’t be hit any further than expected in the short term.

However, he added that “uncertainty still exists in the market, particularly if interest rates are likely to go up in the future. If they do rise and mortgage rates go up then that will obviously hit consumer spending and consumer sentiment.”

Debt relief

Another major respite for hospitality businesses with the continued low interest rates is the relatively low cost of the debt they have accumulated.

“The sector has attracted a lot of debt financing into it in the boom years, and whilst that was great at the time and people put a lot of leverage into these transactions, the problem at the moment is that the only respite they’re getting on that debt is that it’s not costing them too much right now,” said Hemming.

“An increase in interest rates would be a very serious issue indeed. The impact of an increase would come directly off the profit of these businesses and would be an immediate hit to them,” he told BigHospitality.

Related topics: Business, Restaurants, Hotels, Pubs & Bars

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