Market Loop - Interest rates rise to 13 year high

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17th June 2022

Bite-sized business news from the UK and beyond

Good morning If you own an older iPhone then you could be in line for compensation as part of a £768m lawsuit against Apple. It’s alleged that the tech giant deliberately slowed down the performance of its phones with a software update in 2017. Up to 25m Brits who owned an iPhone 6, 6 Plus, 6S, 6S Plus, SE, 7, 7 Plus, 8, 8 Plus and iPhone X model could be able to claim damages if the lawsuit is successful.

Today's stories

Going up: Interest rates rise to 13 year high
Going down: Rising customer returns sink Asos profits

ECONOMY
Interest rates rise to 13 year high

What happened?
Yesterday, the Bank of England raised interest rates for the fifth time in a row to 1.25%, the highest level since January 2009.

Through interest rate increases, the central bank is attempting to raise the cost to borrow money, slow economic activity, and bring down inflation that’s ripping at 40-year-highs.

What a difference a year makes. A year ago, the Bank of England, and its counterparts in the US and Europe, thought inflation was “transitory” ie would die down once the world had returned to normal post the pandemic. But due to a mix of resilient consumer demand, persistent supply chain bottlenecks, Covid lockdowns in China, and the outbreak of war in Ukraine, prices kept going up.

There was no question that the Bank was going to raise rates yesterday. UK inflation is running at 9%, way above the 2% target, and set to reach 11% by the end of the year fuelled by soaring energy bills.

The Bank has signalled that that it would “act forcefully” – read that as raise rates further - if needed to prevent high inflation becoming more persistent.

The big question is whether the cost of borrowing can rise without leading to a recession. The UK economy is already in a vulnerable state, GDP shrunk for a second consecutive month in April with several economic think tanks forecasting tough times ahead. The OECD predicts that the UK will be the weakest G7 economy in 2023 as higher interest rates, tax increases, reduced trade and soaring food and energy costs weigh on households.

Other stories to keep you in the loop

Tube strike: Passengers warned not to travel during next week’s industrial action
New deal for private renters published
Owner of UK chip designer Arm may float some of firm’s shares in London
Gen-Z super-app Cleo hits $500m valuation despite tech downturn
Elon Musk hints at layoffs in first meeting with Twitter employees
Gatwick cuts summer flights after staff shortages
Two potential bidders for THG walkaway from online retailer
Morrisons mistakenly lists £2.50 whisky

ONLINE
Rising customer returns sink Asos profits

What happened?
Yesterday online retailer Asos warned that its profits for this year would be £20-60m lower than expected driven by a higher rate of customer returns.

Consumer behaviour has started to change as the cost of living crisis begins to bite. Asos has seen a steep jump in the number of items being returned as customers realise after purchasing that they might no be able to afford the goods.

Compared to physical stores, returning items to online retailers is much more expensive. That’s because the process is manual and costly with shipping, sorting and cleaning involved. Also returned stock often has to be discounted before they can be resold. Asos doesn’t charge customers for returns so bears all the costs itself.

Looking ahead, Asos is more exposed to a consumer downturn. The company's average 20something customer is particularly affected by the cost of living crisis as they have lower discretionary income with rent, petrol and food going up in price in many countries.

Fair to say investors were spooked by the news. Asos shares plunged 30% to £8, a 12 year low and a stark contrast from the £59 reached in March 2021 when the company benefited from a lockdown-related shopping boom.

Asos isn’t the only retailer that’s feeling the pain. Yesterday fast fashion giant Boohoo reported that sales in the UK had fallen for the first time in its history, blaming supply chain disruption and fierce competition from international rivals. Shares in bike retailer Halfords dropped 27% yesterday after it announced that inflation was hitting earnings and demand for its products.

Stat of the day

8 million Australians have been urged to turn off their lights in a bid to save energy

Interesting links from around the web

The world's cheapest Michelin-starred restaurants
Mapping the migration of the world’s millionaires
How to find your people
Father's Day gift ideas

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Market Loop - Interest rates rise to 13 year high

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