A decision by the Bank of England yesterday (2 November) to raise interest rates for the first time in ten years is unlikely to have an immediate impact on consumer spending, but may begin to bite in 2018, observers say.
The rise in the official bank rate from 0.25% to 0.5% marks the first increase since July 2007, and was justified by the Monetary Policy Committee (MPC) due to record-low unemployment, rising inflation and stronger global economic growth.
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“While the increase in interest rates is a small and highly anticipated change, this is the opening move in a new phase of economic management,” said Rachel Lund, head of retail insight & analytics at the British Retail Consortium (BRC).
“Higher rates in the current environment leave the Chancellor some significant risks to prepare for, particularly as far as consumers are concerned.
“Consumer spending has slowed sharply in the last year as inflation, fuelled by the currency depreciation, has accelerated. At the same time wage growth has remained frustratingly weak and consumers have compensated by borrowing, with consumer credit returning to pre-crisis levels.
“Higher interest rates will only serve to curb borrowing, squeeze household finances – particularly for the less well off, and reduce spending. They will do nothing to increase wage growth.
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By GlobalData“So, in an already challenging environment, without action from the Chancellor in his budget this month, the risks of a further slowdown in consumer spending have become very real.”
Rain Newton-Smith,chief economist at the Confederation of British Industry (CBI), adds: “The decision to raise interest rates comes as no surprise, given the recent signals from the Bank and several Monetary Policy Committee members signalling their intention to vote for a change of course.
“While it’s the first rate rise in over a decade, it is only taking the rate back to the level seen in August 2016 and at 0.5% it remains near rock bottom.
“Businesses will be watching the reaction of consumers closely and what’s important is the pace of any future rises. As rates creep up, it’ll be important to keep an eye on the impact for those at the lower end of the income scale.”
