Motor industry benefits from 1.5 per cent rate cut
6 November 2008

The Bank of England has cut interest rates by 1.5 per cent, appeasing leading UK motor industry figures who have called for dramatic action in recent days.

Reducing interest rates to 3 per cent from 4.5 percent – a move that represents a significant shift in British economic policy – could boost the confidence of new car buyers and make credit more freely available from banks.

David Smith, chief executive of Jaguar Land Rover, had this morning called for “courageous and decisive action” to bring UK interest rates more in line with America’s.

The Bank of England’s landmark decision comes just a day after JLR announced 400 further redundancies from its UK factories.

Society of Motor Manufacturers and Traders (SMMT) boss Paul Everitt echoed the Jaguar boss while announcing the worst decline in cars sales since 1991 today. He called for “cuts in interest rates” to be “swiftly passed on to consumers.”

The SMMT and JLR had blamed a lack of consumer confidence for declining sales, something that interest rate cuts could help remedy.

But UK car manufacturers are still pushing for European investment to develop more efficient vehicles.

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Comments
15

6 November 2008

Funny that, I thought the record-breaking rate cut was to boost the government vote in Glenrothes.

Mustn't be churlish though, this is indeed great news - for Mr Tata.

6 November 2008

More accurately "Rate cut MAY boost car insudtry"
The important figure is the LIBOR - the rate at which banks borrow from each other, which is used to set commercial rates. This hasn't gone down in response to any of the last 3 rate cuts, so I'm not going to hold my breath.

If libor doesn't drop people won't be able to get cheaper loans to buy cars, plus their mortgage rates won't drop so they won't have more to spend. And with used cars currently being worth as much as used chewing gum no-one wants to sell their existing motor or accept a horrifying part-ex price.

6 November 2008

[quote horseandcart]Funny that, I thought the record-breaking rate cut was to boost the government vote in Glenrothes.[/quote]

No sir. The government doesn't set interest rates, the Bank of England does.

6 November 2008

[quote phenergn]The important figure is the LIBOR - the rate at which banks borrow from each other,[/quote]

good stuff phenergn, but there is increasing suspicion that the LIBOR reported figure itself is rigged, by the banks, to understate the actual risk on many investments. After all most things to do with banking and finance are crooked, I don't see why LIBOR should be immune.

As to the 150 basis points cut, it will have a temporary effect sucking in the most gullible, only to be crucified when asset prices of houses and cars etc. continue to fall. After all, look at the basket case United States. They began this rate slashing months ago and are now down to 1% and their car market fell 32% in October. House prices in the UK rose over 200% between 1997 and 2007, whereas in the US the housing bubble only really took off after the dot.com bust and law changes to bank leverage and loan availability in 2003/4, causing an approximate 100% average price rise over the 1997-2006 period. The UK is in terrible shape, and this rate cut, to be followed by at least a 100 point cut before or after Christmas is a sign of desperation, of a collapsing bubble economy.

The only thing that's keeping UK car sales afloat, in terms of not twenty percent odd falls but Ireland(-55%) or Spain(-40%) type cataclysmic like falls is the relative buoyancy of fleet purchases. Look at the SMMT figures. Private purchases are down by nearly half and 'business' purchases - presumably - mainly leasing type sales - are down by around a third. If the UK, like Ireland or Spain or Hungary is forced to slash spending - as it should do - then an awful lot of public sector vehicle purchasing will disappear overnight. Brown's 'spending his way out of recession' is temporarily keeping budgets flush for councils, Whitehall, the cops and so on, but he's making things worse, far worse ultimately, and eventually he will be forced by lack of buyers for UK debt to implement austerity measures, and then the real trouble will begin.

6 November 2008

It's not clever to use "basis points" instead of "percent", you know. It doesn't make you any cleverer. You mean 1.5%.

6 November 2008

The car industry has new tax to contend with too. £950 on high CO2 vehicles. Poor bastards are crucified. Hope they use this rate cut to give some good 0% deals. Might get a few people out.

6 November 2008

[quote Bruce Wayne]Hope they use this rate cut to give some good 0% deals. Might get a few people out.[/quote]

Bruce,

as the UK is headed down the same path as US, i.e. 1% central bank rates and then presumably 0%, it could be useful to know that even with what would appear temptingly good finance terms to stimulate car sales in fact the availability of finance in the US for car buyers is worse than ever. GMAC, the once wholly owned finance arm of GM, but now 51% owned and controlled by Chrysler owner, Cerberus, has hauled back vehicle financing in the US, especially for GM dealers, to almost nil. This is a large part of why GM's sales are down 45% and GM headed for bankruptcy. GMAC has just this week withdrawn all financing from a large number of European countries, including Hungary and Greece from memory - you can Google search it to see the full list. I beleive there are only eleven countries left in Europe that GMAC will still offer finance in. The point is, just because a central bank appears to be offering interest free money this will not be reflected automatically in large ticket financing like car buying. BMW's finance arm has just declared the best part of one billion euros of write-off in its finance arm, mainly due to bad leasing deals in the US, where the car resale value was far less than anticipated.

[quote Bruce Wayne]The car industry has new tax to contend with too. £950 on high CO2 vehicles[/quote]

As to the £950 purchase tax for >255g/km CO2 emitters from April 2009, I agree, this is another tax kick in the stomach for Bentley, JLR and co. in the UK. Did you know by way of glaring contrast the German govt. yesterday agreed to waive vehicle tax immediately until 2011 for any vehicle with a Euro 5 compliant engine? For instance the new 730d will save its owner the best part of a thousand euros in VED equivalent tax over the next two years. Now that's a good purchase incentive, and one that will boost the German auto industry and its biased to high power, larger vehicle output.

6 November 2008

Good info there about the German market and their VED. Seem a bit more sympathetic, don't they ?

I'm not sure that your analysis about the US market is applicable here to quite the same extent. The UK traditionally is a market that has more of a history of HP rather than operating leases with a residual value left over at the end of the lease. It is these residual values that have slaughtered the car finance companies in the States and has influenced their approach to interest rates. In fact, as far as HP is concerned the US has been a relatively cheap place to finance a car. Our own finance companies, to the extent that they are not linked to an American parent, are in much better condition and so might well be able to allow cheaper deals providing they are well funded. It is all relative, though. Auto finance sector is not in great condition.

6 November 2008

The German exchequer is forgoing around €3 billion in vehicle taxes to support their car industry. Not surprising when by some estimates as many as one in seven jobs in Germany are reliant on it.

As to the UK, Bruce, I guess only time will tell over the next few months or so, to see if cheaper and more plentiful credit comes through for car buying. However, if mortgage financing is anything to go by it looks already as if most banks will not be following suit with reduced rates. Their prime objective for now is maximising cash for reserves, so cutting saving rates and maintaining lending rates or even raising them - Northern Rock.

6 November 2008

Yup. Very true. This is what the government wants of the major banks although to Daily Mail readers it seems like profiteering. Time will tell if the auto / finance companies are subject to the same requirements. Depressing times.

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